A solid result of a government bond auction brought a welcome relief to the Forex market. Intra-day: the forint was moving sideways till the noon, then released results of a 3Y and mainly 15Y bond auction brought a positive tone to the market. Hence, the EUR/HUF drifted south in the afternoon, the pair reached its intra-day low (250.60) just before the closing. It is worth noting that the market shrugged-off the ECB meeting and Mr. Trichet’s comments since they were in line with expectations.
The most information, however, came just after closing as Reuters revealed an interview with an influential dovish member Judit Nemenyi. She said that apart from the political and the budget uncertainty inflation prospects are fairly stable and that is why a small rate cut could be feasible. Importantly from the FX market point of view, Nemenyi believes that the NBH inflation goal could be achieved with a somewhat weaker forint.
So is a rate cut feasible? We do agree that a weaker forint might not threaten the medium-term inflation goal (3% since 2007). However, given huge macroeconomic imbalances a rate cut before the April elections will naturally increase probability of a sudden capital flight from Hungary’s fixed-income markets. This is the unpleasant trade-off, which the NBH should deal with.
(CSOB - Investment research)