The central bank lifted its main deposit rate by 50 basis points to 6.5% in an effort to strengthen the currency, which has dropped to a record low against the euro this month. Pressure on the forint has intensified since Moody’s downgraded Hungarian sovereign debt to junk status, reflecting Budapest’s failure to secure a bailout from the International Monetary Fund.
Carolin Hecht, strategist at Commerzbank, says even a 100bp move would have provided the forint with only temporary support.
“Who would feel that 100bp could compensate investors if the forint regularly loses more than twice that against the euro intra-day?” she asks.
“The carry-to-risk ratio is more than unfavourable here.”
Société Générale concurs that a 50bp hike is nowhere near enough to restore confidence in the forint.
The bank said it had believed that in view of the recent volatility of EURHUF – which now stands around 309.00 – the National Bank of Hungary would have had to raise rates anywhere between 200 to 300bp, possibly in steps of 100bp to stabilise the forint.
“We feel strongly that, with a possible IMF deal some distance away, raising rates is the only possible anchor that could support the forint in the short term,” says Guillaume Salomon, emerging markets strategist at SocGén.
“As such, we no longer feel that EURHUF should be capped around the recent highs. In the absence of higher policy rates and any IMF deal in the short term, EURHUF could trade quite a lot higher over coming months.”
Of course, other Central and Eastern European currencies have also been hit hard with a double blow by the growing crisis in the eurozone.
First, their economies are vulnerable to the economic slowdown in Western Europe.
Second, eurozone banks have pulled capital out of the region in response to the debt crisis – an echo of the deleveraging that sent local markets tumbling in early 2009, when the region was undermined by worries over a post-Lehman bank pull-out.
While the forint has lost 15% against the euro since the summer, the Polish zloty has dropped 13% to stand at 4.5280. The Czech koruna, which has been seen as a regional safe haven, is also down by 8% at 25.527 against the euro.
Some say the Czech koruna is the easiest play for investors, given the apparent indifference of the Czech central bank to strength in its currency.
Indeed, while the weakness of the forint has alarmed the National Bank of Hungary, Poland’s central bank has made repeated interventions, albeit with limited effect, to slow down the depreciation of the zloty.
“Investors looking to hedge CEE risk are turning to the liquid proxy for the region, the zloty, just as they did in 2009,” says Chris Turner, head of foreign exchange strategy at ING Financial Markets.
However, the Polish authorities have their own agenda, whereby they are seeking to cap EURPLN around the 4.55/60 area into year-end to suppress the value of their external debt and keep their debt-to-GDP ratio below 55%. A ratio above that for 2011 would prompt enforced fiscal consolidation under the constitution.
Turner says, with the forint looking vulnerable but politically difficult to sell and the zloty meeting official support from authorities, attention has turned to the koruna.
He says the koruna is not a liquid proxy for the region, since according to the 2010 BIS FX survey, CZK FX liquidity is merely a quarter of PLN liquidity.
“Yet the local central bank seems quite relaxed about CZK weakness, acknowledging CZK volatility as a safety valve to external developments,” says Turner.
“We would not see verbal intervention from the CNB unless EURCZK very rapidly traded above 28.00. Our year-end EURCZK target is 26.50, but with no sign of a eurozone solution, 28.00 is attainable.”