The Hungarian forint struck two-month highs on Thursday on expectations Budapest will secure a much-needed aid package, as emerging assets rose broadly after the US Federal Reserve pledged to maintain low interest rates.
The Fed on Wednesday reiterated it expected rates would not rise until late 2014 at the earliest, boosting the appeal of higher-yielding emerging market assets.
The forint has rallied by more than 4 percent against the euro since Monday, after the European Commission opened the way for talks with Budapest on EU/IMF aid, ending a five-month dispute over Hungary's central bank independence.
“While it will be difficult, an IMF deal will eventually be concluded as both parties have an interest in finding common ground,” said Murat Toprak, emerging markets strategist at HSBC.
Appetite for riskier emerging market assets increased after the Fed said US interest rates would stay low and it was ready to resume its bond buying if the US economy weakened.
Very low US rates have made emerging market yields more attractive and created excess liquidity, some of which has headed to emerging markets.
“The key thing is interest rates will stay low for a long time,” he added.
The MSCI emerging equities index rose 0.6 percent to its highest since Monday, moving further away from recent 2-1/2 month lows, and the Thomson Reuters emerging Europe index hit its highest in nearly three weeks.
The forint gained 0.25 percent and Hungarian stocks hit three-week highs after leaping more than 4 percent on Wednesday.
A senior government lawmaker said that a deal on a financial backstop to stabilise Hungary's heavily indebted economy would probably be less than 20 billion euros and could be hammered out by the end of June.
Hungarian debt insurance costs dipped to 528 basis points in the five-year credit default swap market, according to Markit, and have fallen 70 bps this week.
“There is still value in selling Hungarian CDS ... given our expectation that a deal is likely to be signed by the summer,” said analysts at Morgan Stanley in a client note.
Hungary's central bank, however, warned it saw a risk of a severe credit crunch.
The Turkish lira hit its highest since early March on expectations of monetary tightening.
Turkish Central Bank Governor Erdem Basci said on Thursday the bank would implement additional monetary tightening if it saw a threat to reaching its inflation target.
Rising risk appetite pushed the South African rand to 3-1/2 week highs and the Czech crown was steady around its highest in a week, recovering from recent two-month lows as the Czech centre-right government this week looked to have avoided collapse.
Romania's leu also rowed back from recent lows ahead of a no-confidence vote against the government on Friday, though Romanian CDS tested two-month highs.
Emerging sovereign debt spreads tightened by 2 basis points to 327 bps over US Treasuries. - Reuters