"Nordea expects Hungary’s forint to appreciate towards 255 versus the euro in the coming months, saying the currency has underperformed in 2010 and that there is "room for positive surprises."At the same time, it called attention to several event risks, not least the upcoming election (April), contagion from Greece, the expiry of the IMF agreement and the possibility of ERM-2 membership soon to come. Nordea sees two more rate cuts ahead, which would mean rates bottoming out at a relatively high level.
"We expect the HUF to strengthen towards the 255 level versus the EUR in the coming months," said Nordea’s Elisabeth Andreew and Anders Svendsen.
They base this "fairly optimistic" outlook on their belief that there is "room for positive surprises on many fronts, which the market seems to have ignored".
* Hungary has been one of the most successful countries to fulfil the IMF’s criteria;
* a new government "will firmly be in place" after the elections in April.
"This is good news even though we see some risk of a looser fiscal stance."
The analysts expect EUR/HUF to be at 255 in 3M, 260 in 6M, 265 in 12M and 270 in 24M.
Furthermore, Andreew and Svendsen only expect two more rate cuts (25 basis points each) which will leave the key policy rate relatively high at 5.50%.
"Risks are skewed towards more cuts rather than fewer, at least as long as the HUF does not weaken significantly. The first rate hike is far away," they said.
Finally, the economists noted that risk appetite seems to be returning gradually, as the worries about Greece have started to recede, at least for now. Hungary’s current USD 25 bn IMF-led credit facility expires in October 2010. The analysts believe Hungary’s ERM-2 membership "is a possibility late 2010/early 2011."
Fiscal risks
"The domestic economy is still struggling after the numerous austerity measures that have been taken to bring fiscal policy back on a more sustainable path. However, there is some light at the end of the tunnel and a very gradual recovery is ongoing. Hungary is likely to lag regional peers for some time, though. The fiscal situation is the main risk, especially due to the upcoming general elections. We see some risk of a looser fiscal stance even though it could violate the IMF agreement."
Strategic view
Nordea keeps its investment strategy entered into on 9 December 2009, where it is long a EUR put/HUF call strike 258.50 with maturity on 9 June 2010. "We still think EUR put/HUF calls in 4-5 months are a good buy. For hedging the HUF, we prefer forward hedging for HUF expenses and participating forwards or plain vanilla options for HUF revenues, to be able to participate in a HUF strengthening."
Source: Portfolio Online Fiancial Journal
17.02.2010