Forint at its Strongest in Three Months

Hungary's forint has not been as strong as on Thursday morning for three months. Shortly after 8 A.M. the HUF was quoted south of 296 versus the euro on the interbank market. After 09:00 it gained even more, going below 295.

The forint rebound with momentum from its all-time low reached early in the year. During its appreciation it breached both psychological and technical barriers with ease, buoyed by the expected turnaround in the government's economic policy and increased confidence that Hungary will in the end be able to strike a credit deal with the IMF/EU.

As long as investors believe Hungary will eventually strike a deal with the IMF/EU on a credit line and global sentiment remains supportive, the correction in the forint exchange rate that has been going on since it hit a new all-time low vs. the EUR a few weeks ago could remain persistent.

The unexpected interruption in the central bank's (NBH) rate hike cycle also provides short-term helps for the HUF, given there is already a smaller risk of a rise in government bond yields. (The Monetary Council decided on Monday to keep rates on hold after raising it by 50 basis points at each of the past two meetings.)

In the medium term, however, the situation may not be so peachy. The uncertainty caused by the surprise decision not to hike the key policy rate can make the rate path as oblique in a worse market environment as we witnessed at the end of 2011 when the 12-month discount T-bill auctions did not turn out overly well.

As a result, the forint appreciated well south of 300 to the euro. It is true, though that this represents a great improvement only compared to the Nov-Dec levels, as EUR/HUF was seen stabilising around 270 in the summer.

Source: portfolio.hu