The MNB is reducing liquidity through moderate withdrawals of FX swaps

HUNGARY - In Brief 30 Jun 2020 by Istvan Racz

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The stock of the MNB's 'fine-tuning' FX swaps essentially did not move between end-April and early last week: the outstanding stock decreased just marginally, from HUF 1929bn to HUF 1922bn in this period. But then, on June 22's tender, the stock was reduced to HUF 1884bn and on June 29, it was cut further to HUF 1818bn. In fact, the MNB did not sell any new swaps yesterday, and the stock is set to fall because of the week's maturity of old contracts.Of course, the MNB is supporting the forint by net withdrawals of FX swaps, and it is doing so around EURHUF 355-356. But this time around we would not say that the Bank's decision to cut the swap stock is primarily an outright indication of its exchange rate preference. Instead, it may have started from the liquidity side indeed: the amount of unsterilised HUF liquidity had risen to 325bn by yesterday, from the HUF 50-100bn range held in the previous two weeks. As a consequence, the O/N BUBOR rate has dropped to 0.32% today, an about 50 bps decrease compared to two weeks ago. Naturally, BUBOR for longer maturities have all converged to the 0.75% base rate, which is also the effective sterilisation rate. But the MNB just may not like the idea that it is forced by its own policies to pay the sterilisation rate on an ever-increasing stock of one-week deposits all the time. The current stock of those is HUF 1646bn, up from HUF 1427bn a week ago, as the Bank's collateralised loans and NHP Hajrá refinancing loans are generating increasing amounts of forint liquidity, which is to be taken into the one-week depo, to keep the sterilisation rate effective. Now the actual impact of yesterday's FX swap tender will be felt at tomorrow'...