Sunday, June 12, 2011

Forint Slips on Moody’s Downgrade

By Eva Szalay

LONDON–Hungarian assets weakened Monday after Moody’s Investors Service downgraded the country’s debt by two notches, to Baa3 from Baa1, maintaining a negative outlook.

The forint slipped in early London trading by 0.7% against the euro, Hungarian government bonds rose by 0.1 percentage point across the curve on the secondary fixed-income market and stocks also dropped, although losses were indirect there as they were due mainly to the easing forint.

The ratings shift had been widely anticipated, and still leaves Hungary with an investment-grade credit rating, which means many investors can still buy the country’s government bonds. That has limited the impact on the currency.

Nonetheless, analysts urged caution and warned that further forint weakening could trigger rate rises.

“If the currency is under selling pressure, the National Bank of Hungary could become very concerned about currency stability,” TD Securities strategist Christian Maggio said in a note.

If the exchange rate moves above 290 forints to the euro or 225 forints against the Swiss franc, another key cross to monitor, the central bank could deliver emergency rate increases, even with unscheduled Monetary Policy Council meetings, Mr. Maggio added.

The euro traded recently at 279.32 forints, marking a rise of 0.7% from the point immediately before the ratings announcement. The Swiss franc recently changed hands at 214.40 forints.

Last week, the country’s central bank raised interest rates to 5.5% from 5.25% in a surprise move. Some market watchers saw the move as politically motivated, given the deepening battle between the country’s central bank and its government.

“While a downgrade was not necessarily a surprise, the market is quite likely to respond negatively in the near term, with weakness in the forint and a rise in short-end rates,” Benoit Anne, a currency strategist at Société Générale, said in a note to clients.

The ratings agency said the downgrade was motivated by the country’s loss of financial strength, by a deteriorating structural budget deficit and increased worries about Hungary’s fiscal sustainability.

Nigel Rendell, a currency analyst at RBC Capital markets, said the announcement has been widely anticipated and “no major impact” is expected on the forint. He cautioned, however, that Fitch might follow suit with a
downgrade, but such a move isn’t seen to be imminent.

Although government bond weakening was muted as Hungarian bonds have eased significantly over the past two weeks, a further rise in bond yields is expected if the euro-forint cross breaks resistance level at 280, a trader said. The weakening trend is seen justified due to the rating agency’s negative forecast, the trader added.

Hungarian stocks reacted indirectly to the downgrade news as the forint weakened, but the stocks’ fall is far from excessive, a Solar capital trader said. Hungary’s benchmark BUX index was recently down 1.2% at 21264.95.

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