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Foreign Exchange

HUF investors could find a Turkish delight

There has been nothing but bad news for the Hungarian forint in recent weeks, but for investors betting on further losses it might pay to consider the chances of a turnaround in the fortunes of the Turkish lira.

The International Monetary Fund said that no decision had been made about “whether or when” formal discussions with the Hungarian government will start over a much-needed aid package, after a downgrade by S&P of Hungarian sovereign debt to junk status last month. The IMF cited the need for Budapest to engage on key policy issues, a reference to the basic law passed through the Hungarian parliament on December 30. Among other controversial measures, the law pushes for further centralisation of power into the hands of prime minister Viktor Orban and infringes on the independence of Hungary’s central bank.

The chances of Hungary securing funding from the IMF have now faded greatly after the passing of the law, while the EU has stated it has no plans to enter into talks with Budapest over a rescue deal.

“We reiterate our view that the negotiations with the IMF will be long and arduous, and that a deal, if any, is unlikely in January,” says Benoit Anne at Société Générale. “We thus keep a bearish view on the Hungarian currency and rates.”

All this comes at a time when Hungary has to raise funds in the bond market. The first bond sale is set for January 12, but there is a bill sale scheduled on Thursday that will also be closely scrutinised. Any failure could well provoke further downgrades.

Of course, the potential for more bad news has been well discounted in the currency market, with EURHUF hitting a record high above Ft320.00 on Wednesday.

Many believe there is potential for EURHUF to rise further, with Ft325.00 an initial target for Alan Collins, technical analyst at PIA-First.

However, much of the value in that trade might already be in the price, while other popular regional trades, such as shorting the HUF against the PLN and CZK are also crowded.

Ilan Solot, emerging market strategist at Brown Brothers Harriman, believes there is value in shorting the HUF against the Turkish lira, given that the near-term risks are tilted towards positive news for the TRY and negative for the HUF.

Turkey’s experimental monetary-policy stance saw it cut interest rates by 50 basis points in August in a bid to stimulate the economy, while using credit measures and micro-managing liquidity via repo operations in a bid to tame inflation.

That has not been a success, with the TRY weakening by 11% against the dollar and inflation increasing by four percentage points since the decision. Furthermore, Turkey’s central bank has had to intervene aggressively to prop up the TRY in recent days.

Solot believes Turkey’s central bank will not be able to sustain the current level of intervention without concerns rising over the levels of its FX reserves, especially should risk appetite take a turn for the worse. Ultimately, he believes the Turkish central bank will have to raise interest rates to support the currency and keep a lid on inflationary pressure, which is likely to lead to a sharp short-covering rally in the TRY.

“We see long TRYHUF as an alternative to our established, and more crowded, long PLNHUF position,” says Solot. “Our initial target for TRYHUF is the 2011 high of Ft137.44.”

TRYHUF stands at around Ft130.00.

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