"Hungary’s forint may gain as much as 10% versus the euro in the first half of 2010 as Hungarian and Polish assets reach a "sweet spot," said Benoit Anne, head of currency and debt strategy at Bank of America Merrill Lynch.The HUF’s appreciation will allow the central bank (NBH) to cut its key policy rate to a record low 4.50% this year from 6.25% currently, Anne told Bloomberg in a phone interview on Friday.
He expects a 50-bp rate cut to be delivered on Monday (25 Jan). The median estimate of 10 economists in a Bloomberg survey is for the benchmark to bottom at 5.50%. A Portfolio.hu poll of 17 analysts showed the same outcome on Thursday. Eight of 10 economists surveyed by Bloomberg predict a 25-bp reduction to 6.00% on Monday, while this ratio in Portfolio.hu’s poll was 14 to 3 (the latter forecasted a 50-bp cut).
The Monetary Council last month slowed the pace of cuts to 25 bps from 50 previously, citing a plunge in investors’ risk appetite, which weakened the forint. The base rate was slashed by a total of 325 bps since July.
Hungary’s interest rate reductions have trailed central banks including the U.S. Federal Reserve and the European Central Bank (ECB) because policy makers looked to defend the forint, which was sold off during the credit crisis. Investors are turning to emerging-market assets as they seek higher returns and bet on the region’s improved economic performance, Anne said.
"Emerging markets are in the sweet spot right now," Anne told Bloomberg.
"Hungary is one of the most attractive local debt markets across the whole of emerging markets."
He believes the HUF may strengthen to 245 to the EUR by June, from current levels around 270.
Hungary was the first member of the European Union to secure a bailout in 2008 as the lack of demand for its bonds raised the risk of a default. Anne believes the country’s debt may become more attractive after the government cut spending last year while others raised expenditure as a way out of the recession.
"Local investors tend to be much more bearish than I am," Anne said. "I don’t see a risk of a major sell-off in the forint over the next few months."
Most emerging-market economies will putt off hiking rates for longer than the market forecasts and the tightening may be less than currently priced in by investors as policy makers seek to bolster growth, boosting local equity markets, Anne said.
Regional currencies may start to weaken in the second half of the year if the ECB begins to raise its benchmark rate from 1.0%, increasing investors’ risk aversion, he added.
Anne said the HUF may weaken to 275 to the euro by the end of the year."
Source: Portfolio Online Financial Journal
25.01.2010