Forint Rises as Foreign Funds Flock to Investment-Grade Hungary

(Bloomberg) -- Hungary’s forint jumped to its strongest in more than a year as a surprise return of the country’s debt to investment-grade status at S&P Global Ratings last week fueled demand.

The currency gained 0.7 percent to 306.10 against the euro, the highest since May 2015, amid a broad emerging-market rally supported by the Federal Reserve holding off interest-rate hikes. Hungary’s local-currency bonds extended the strongest performance this month among east European peers, also helped by the central bank’s cap on how much cash lenders can keep in its main deposit instrument which has channeled more money into the country’s debt.

Forint Rises as Foreign Funds Flock to Investment-Grade Hungary

S&P became the second ratings firm to place Hungary above junk status, making its bonds eligible for funds only allowed to buy investment-grade securities. That move has lured inflows from overseas investors to the country’s debt which is already being used by local lenders to compensate for the central bank’s limits on its three-month deposit facility.

"The forint will face strong appreciation pressure as long as the international market sentiment doesn’t sour or central bank officials don’t comment on foreign-currency developments," said Gergely Urmossy, an analyst at Erste Group Bank AG’s Hungarian unit. "The global environment and Hungary’s economic fundamentals both support the currency’s momentum."

The yield on three-year government bonds, which have gained on 11 of 16 days this month, fell four basis points to a record 1.20 percent.

Forint Rises as Foreign Funds Flock to Investment-Grade Hungary

Foreign investors have increased their allocations to forint-denominated government bonds by 137 billion forint ($503 million) since the end of July after shedding about 1.2 trillion in the 12 months ending May as Hungary’s former key creditor Franklin Templeton cut holdings and the central bank created incentives for domestic banks to purchase more debt.

"The central bank seems to be happy with the exchange rate," said Gergely Palffy, a Budapest-based analyst at Raiffeisen Bank International AG, adding that the bank’s forecast for the currency to reach a range 305-310 per euro range next year may underestimate its strength. "Policy makers now see internal wage pressure as a more important factor for raising consumer-price growth back to the target and may be questioning how much a weaker currency contributes to the overall outlook," he said.

Deputy Governor Marton Nagy on Tuesday reiterated that the central bank has no exchange-rate target and sees stability as more important than the level of the currency.