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Hungarian forint falls to record low against Polish złoty

by SuperiorInvest

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The forint has sunk to a record low against the Polish złoty as concerns grow over the independence of Hungary's central bank, while Warsaw's improving relationship with the EU has unlocked tens of billions of euros in money.

The two central European countries have followed markedly different paths in recent months. Hungary has been bogged down in disputes with international partners such as the EU and other NATO members, while tensions between the government and the central bank have risen. Meanwhile, the European Commission is starting to release Poland's €137 billion in frozen EU funds after it recently decided that Warsaw had made “decisive” efforts to restore the rule of law.

The forint has fallen 6 percent against the złoty in the past six months to its lowest level on record. The sell-off gained momentum this week after Hungary accelerated its pace of interest rate cuts. This came just a day after the European Central Bank asked Budapest to respect the independence of the country's central bank.

The rate cut has further narrowed the gap between the two countries' borrowing costs. Hungary's key rate fell 1 percentage point to 9 percent this week, after falling from 13 percent in the fall. Meanwhile, rates in Poland have remained at 5.75 percent since the October parliamentary elections that brought former European Council president Donald Tusk back to power.

“The advantage of the guilder in interest rates [over the euro] is fading while the złoty's interest rate advantage remains,” said Péter Virovácz, an analyst at ING in Budapest.

Tensions in the Hungarian capital rose on Thursday after central bank governor György Matolcsy said Viktor Orbán's government was planning a “significant attack” on the bank's independence and that the prime minister's policy of boosting economy through stimulus was “doomed to fail.”

Orbán's government, which has pushed for much faster rate cuts to help boost anemic economic growth, has proposed a bill that would allow it tighter controls on central bank operations, though not monetary policy. . Growing hostilities between Matolcsy and members of Orbán's cabinet also contributed to many investors believing that the central bank was being targeted by government influence attempts.

Meanwhile, in Poland, the central bank has been reluctant to cut rates, and analysts expect the next cut to come in the third or fourth quarter of this year, if at all. Authorities have focused their attention on medium-term inflation risks, highlighting threats from a tight labor market, strong wage growth and expansionary fiscal policy.

The złoty has been one of the best-performing major currencies globally over the past year, rising 9.5 percent against the dollar. The forint has been among the 10 worst, with a fall of 3.9 percent.

“The rate differential is a major factor driving currency divergence, and central bank independence is at risk in Hungary,” said Piotr Matys, currency analyst at InTouch Capital. “At the same time, there are EU funds that will flow to Poland, while Hungary still needs to do more to gain full access to EU funds.”

As Poland begins to receive billions of euros from the bloc, markets expect at least some of the funds released from Brussels to be converted into złoty, providing additional support to the currency.

While the EU released 10 billion euros for Hungary at the end of last year, Budapest faces “no such prospect” of a full release of European funds, according to ING's Virovácz. All funds released to Hungary are delivered and typically held in euros, providing little support to the guilder.

Divergent political and economic drivers in the two central European countries have helped make their currencies “one of the most traded relative value currency pairs,” said Murat Toprak, currency strategist at HSBC.

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