Hungary's forint jumped 1 percent and its bonds gained on Friday on renewed hopes that the country may be moving closer to a deal with the IMF, while Romania's leu fell as markets tried to test its central bank's willingness to prop up the unit. Budapest said it would scrap plans to tax transactions by the central bank, removing a hurdle in talks on a financial backstop arrangement with the IMF and EU. The news drove the forint currency to a two-week high and pushed government bond yields about 20 basis points lower on Friday.
"The market likes this now, it seems as if the government made a step closer to a deal," a bond trader said. "But it's not over yet, this (the communication) may change again." Budapest is trying to arrange a financing agreement with the International Monetary Fund and European Union to provide a hedge against any worsening in the euro zone's debt crisis.
But it has been dragging its feet in talks since late last year, with delays arising from disputes over legislation such as the transactions tax. On Friday, Budapest said the central bank would be exempt from the tax, and announced fresh budget cuts to keep the deficit below the EU's ceiling of 3 percent.
The forint was bid 1.1 percent higher at 281.80 to the euro, off a session high of 281.50 and outperforming a 0.5 percent gain for the Polish zloty. Romania's leu, meanwhile, lost 0.5 percent. The prospects of an IMF aid deal have helped support the forint. It has gained more than 11 percent this year, making it one of the best-performing currencies globally, along with the zloty, as investors have chased relatively safe higher yields in countries not caught up in the euro crisis.
Stock markets across the region gained as riskier assets benefited from European Central Bank assurances over its bond-buying programme to fight the bloc's crisis. Polish yields were also a touch lower, while the zloty hit a three-week high on persistent foreign demand, dealers said. The leu, meanwhile, has hit a two-month low, inching back towards all-time lows it hit at the height of a political crisis in the summer which raised doubts over Romania's IMF deal.
A parliamentary election is due in December and campaigning and post-vote bargaining could again raise doubts over the country's adherence to its international commitments. The central bank has often intervened in the market to support the currency and the threat of this action is often sufficient to support the relatively illiquid leu.
But some analysts and dealers say the central bank has been less active in its support in recent weeks and attribute Friday's falls to testing the level at which it would step in. "Volumes are not large but it seems that some players have so far focused on testing the central bank's desire to intervene so we can say that it seems sort of speculative trade," said a dealer with a foreign bank in Bucharest. "So far the national bank has stayed sidelined."
Analysts have been cautious on currencies in the past month given that central European economies are mostly either in recession or slowing sharply due to the region's heavy reliance on euro zone partners for trade and banking. The region has already struggled with budget-cutting measures which are dampening consumers' willingness to spend, prompting central banks to start easing monetary policy.
Czech retail sales fell in August, data showed on Friday, which analysts said justified the central bank's move last week to cut rates by a quarter point to near zero. The Czech crown firmed past its 55-day moving average, which had been acting as a barrier, and was up 0.2 percent on the day at 24.869. Minutes from the Czech central bank's meeting last week, released on Friday, showed that rate setters were surprised by the currency appreciation and felt any stronger firming would need to be taken into account.
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