Warning from the MNB: FX swaps can move both ways

HUNGARY - In Brief 26 Jul 2019 by Istvan Racz

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The lack of any tightening measure and a further little change in the statement's language towards a more relaxed mode at Tuesday's (July 23) rate-setting meeting, combined with the ECB's softening tone yesterday, have pushed the forint to slightly weaker levels, to EURHUF 326.5 and USDHUF 293.2 in this morning's trading. Amidst these circumstances, it is quite interesting that the MNB staff came forward with a paper, published in last morning's (July 25) local press (Portfolio.hu), which warned that in order to regulate the level of banks' non-sterilised liquidity in line with the Monetary Council's target, the Bank may move both ways with FX swaps in net terms, i.e. it can also add new swaps to the outstanding stock from time to time.Although the paper started from the statement that the basic trend of banking sector liquidity was expected to be a decreasing one in H2 2019, which could necessitate net additions by the MNB to avoid unduly high amounts of tightening, the conclusion was still a warning that the Bank were prepared to do so through their FX swap instrument, i.e. practically by intervening against the forint on the currency market. Unless the MNB's purpose was to let the forint depreciate somewhat, which is an open question of course, the timing of this paper appears somewhat unfortunate.Note: As % of GDP; Sources: MNB, KSHBy the way, the recently published January-May BOP figures show the net external financing balance having turned around into a deficit of 1.8% of GDP from a 1.7% surplus recorded in the same period of 2018 (see the chart above). The latter means no further deterioration but actually a bit of improvement compared to the Q1 data, when the ...