Emerging stocks seesawed around three-month lows yesterday and currencies were mostly flat, including Hungary’s forint which hit a two-month low against the euro the previous day in expectation of more monetary policy easing.
The dollar eased against a basket of currencies before the start of a two-day meeting of the US Federal Reserve, which is likely to say that it will soon start paring its balance sheet.
But with Treasury yields close to one-month highs, emerging assets failed to make much headway.
MSCI’s emerging equity index slipped 0.2% while average sovereign dollar bond yields over Treasuries widened 1 basis point (bp) to 286 bps, standing just off three-year lows.
The focus is on Hungary’s central bank which is expected to leave main interest rates on hold but ease policy by cutting a deposit cap or cutting the -0.05% overnight deposit rate deeper into negative territory.
It may also signal more delays to meeting inflation targets.
Authorities’ dovishness — policymakers said earlier this month they could use unconventional easing tools to meet inflation targets — drove the forint to two-month lows versus the euro, while pushing it down 2% against the Polish zloty in the past three weeks.
Hungary’s segment of the GBI-EM of local currency bonds has seen yields slump to record lows of around 1.58%, about 80 bps below March levels, while stocks have hit successive record highs for year-to-date gains of over 20%.
“The central bank did reiterate that they would ease policy unconventionally afresh so the forint began to underperform the zloty.
That happened because the central bank introduced unknown event risk,” said Tatha Ghose, senior emerging markets economist at Commerzbank.
There was also the possibility of an entirely different new easing tool, Ghose said, adding: “That’s a bit unknown and why you have seen the forint underperform the zloty over the past month.”
ING Bank predicted the forint would dip below 308 per euro “as the delivery of a cut in the deposit rate would signal to the market that the NBH means business and is indeed not running out of firepower”.
“We expect upward pressure on zloty/forint to continue as the cross shows extremely high sensitivity to the NBH policy stance,” the bank’s analysts said.
Elsewhere, the South African rand was flat, steadying near one-month lows hit on Monday after the tax agency’s attack on auditor KPMG for withdrawing a report on former finance minister Pravin Gordhan’s investigations into businessmen close to President Jacob Zuma.
In Dubai, shares in Dana Gas rose 2.5% ahead of the opening of a trial in London over the company’s non-payment of a $700mn sukuk.
In bond news, Ukraine raised $3bn on Monday in its first sovereign debt sale since its 2015 restructuring.