What happened to the Hungarian forint and why?

Over the past few months the forint was steadily becoming stronger, with all the positive and negative consequences of a strong currency. It was a bonanza for those people who bought their apartments or houses by taking out mortgages in Swiss francs or euros. It was made foreign travel less expensive for Hungarian tourists. On the other hand, it was not so good for Hungarian exports or the rate of inflation.

But on Friday, suddenly, out of the blue it seemed, the Hungarian forint lost 1.88% of its value. It happened around 3:00 p.m. By 4:00 one euro was worth 247.10 forints whereas a day earlier the exchange rate was 242.60 forints to one euro. If anyone is interested in the fortunes of the Hungarian forint against the euro in the last three months one can see a chart here: http://tinyurl.com/67nfnq

Financial analysts cite many factors for this large drop in the value of the Hungarian currency. (Most trading in the forint takes place abroad, especially in London–the FX behemoth, which, according to Gábor Török of Raiffeisen Bank, accounts for 30-4% of all of forint currency trades.) One reason for the drop in the value of the forint was the strengthening of the euro because of Jean-Claude Trichet's speech on Thursday which indicated that the European Central Bank "perhaps… will effect a small change in the interest rate." Another analyst, Gergely Suppan, sees some connection between the plunge in the forint and the equally spectacular drop in the value of the Turkish lira. The Turkish lira's drop had something to do with thousands of Islamic women demonstrating all across Turkey protesting the government's decision not to allow women to wear head scarves at Turkey's universities. Suppan thinks that investors don't really distinguish between the currency of this or that emerging market. Turkey? Hungary? Doesn't matter. I'm no market guru, but this seems to me a far-fetched theory. Especially since the neighboring currencies didn't experience this dramatic move. Suppan expressed his disappointment that the good news that came out about the same time about the balance of trade that was again in Hungary's favor was either not known or not taken into consideration. Another analyst thinks that the drop was actually a good thing. It was a necessary correction because the forint was far too strong.

Others think that this drop in the value of the forint was not entirely due to foreign developments. Dávid Németh (ING) suggests as a cause János Veres's announcement that the ministry of finance was readjusting its prognosis for reaching targets set forth by the National Bank and the ministry a couple of years ago. The goal was an inflation rate of 3% by 2009. János Veres on Thursday about 2:30 p.m. had an interview on a radio station speciallizing in economic news in which he called the goal of 3% inflation by next year unrealistic given the changes that have occurred in European inflation rates since the time this 3% goal was set. According to Németh, Veres's announcement and the Hungarian Central Bank's very negative reaction to it set off the forint's drop. During Friday morning the rate moved from 243.5 to 245.4. And after the American unemployment figures reached Europe at 2:30 the exchange rate shot up to 248.7.

There might be another reason for the precipitous drop in the Hungarian forint. In London rumors circulated that this weekend MSZP would force Ferenc Gyurcsány to retire. There's nothing that moves a market more abruptly and dramatically than a rumor of this sort; it makes every currency trader reassess his position, and most run for cover.

As an aside, most foreigners who invest in Hungary are not too crazy about Orbán's anticapitalist, anti-foreign investment rhetoric. Apparently, Orbán himself knows that he might have problems in this respect if he manages to form a government either this year or in 2010. In fact, he already asked György Szapáry, one of the deputies of Fidesz's Zsigmond Járai during his tenure as head of the Hungarian National Bank, to try to use his connections in foreign financial circles to explain to the world that Orbán is not what Orbán says. Szapáry accepted the job. I guess Orbán remembers what happened when he formed a government in 1998: the Hungarian stock exchange almost collapsed, and it took quite a bit of time to recover.

Another possible reason for the huge drop might be Orbán's speech to a group of businessmen on Thursday. In this speech Orbán brought up the possible restructuring of Hungary's foreign debt. Apparently, this piece of news hit London by Friday and might have influenced some traders. This is what he said exactly: "It is a real question whether it would be possible to negotiate something concerning the restructuring of the national debt or an exchange of debts, or only God knows what other techniques could be employed. Our experts are working very hard on such possibilities." I think that it is clear from this incoherent mumbo jumbo that Orbán knows absolutely nothing about the subject and would be wise to steer clear of the world of finance in his speeches. Another expert, also a former deputy in the National Bank, said that Orbán's experts must have had a heart attack when they heard what Orbán said to this group of businessmen.

Whether any of the internal political developments contributed to the huge fall in the forint one cannot say for certain. But since the other countries in the region didn't see such huge moves in their currencies as the perfect storm developed in the U.S. and Western European markets (Trichet's comment, the spike in the U.S. unemployment rate, and the parabolic move in the price of oil) it's a pretty safe guess that traders responded to some news item(s) or rumors from Hungary. Monday's trading should help to sort out the various hypotheses.

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NWO
Guest
The HUF had clearly overshot on the strong side, and given the fragile state of the Hungarian economy, it is always at risk of a violent correction. I do not know what immediately spooked the market, but I think Veres’ comments certainly did not help. After many years of having zero credibility, the Hu. Government and NBH have been slowly rebuilding their credibility with the capital markets. I think Veres, in particular, has been successful in this. His comments were striking because not only are they a bad idea but they put into question all of the efforts the Government has made to restore predictibility and credibility in its policy. As for Orban’s comments. I really doubt anyone takes them seriously. Doing what he suggests is practically impossible now. Hungary probably should have done exactly this in 1989 or 1990 (like Poland did), but now there is no chance. While the strong HUF is very good for keeping in check inflation (which is remains stubbornly very high), at 240 or so to the Euro it would negatively impact exports which is the last surviving leg of the economy. A long term sustainable FX rate, I think, vis-a-vis the Euro is… Read more »
boiled beef and carrots
Guest
boiled beef and carrots

Contrary to what you say, a strong forint is good for reducing inflation as Hungary has one of the most open economies in Europe. A 10 percent fall in the value of the forint equates to a one percent rise in inflation 6 months out, and vice versa. The fall was due to the EBC, then exacerbated by Veres and then by U.S. data. Yes, the forint is traded in a basket with other high-yielding currencies – which share Hungary’s vulnerabilities in a high budget deficit and current account deficit, like Turkey – and no, no one in London gives a monkeys about what Viktor Orban said about debt rescheduling.

NWO
Guest

Boiled Beef and Carrots
I think we agree. I said the “strong forint is good for keeping in check inflation”, which is another way (if maybe inartful) of saying it helps with the inflation problem. My point was that while a strong forint (around 240) is positive for controlling inflation, in general I believe if the HUF stays below 250, then the inflationary impact is not large. As the NBH no longer targets the Exchange Rate, it really should be the markets judgment now on the quality of monetary and fiscal policy and the relative value of the HUF against other currencies.

boiled beef and carrots
Guest
boiled beef and carrots

Just to be clear, my reference on the HUF and inflation was to Eva’s “On the other hand, it was not so good for Hungarian exports or the rate of inflation.” Not to NWO’s comments.
I would note though in relation to the inflationary impact isnt large below 250, that a stronger forint will deliver MORE rapid DISINFLATION at a time when Hungary has problems with both imported and wage-driven inflation.

Odin's lost eye
Guest

@ Prof Balogh in your article you quote Orban as saying: –
*** “”It is a real question whether it would be possible to negotiate something concerning the restructuring of the national debt or an exchange of debts, or only God knows what other techniques could be employed. Our experts are working very hard on such possibilities.” ”
Is this twerp for real? At the moment banks won’t lend to each other let alone a person who has as you again report *** “most foreigners who invest in Hungary are not too crazy about Orbán’s anticapitalist, anti-foreign investment rhetoric” ***
For what it is worth the FOREX is a free market. In a free market thinks are only worth what someone will pay for them! It is as simple as that. If FIDES do not understand that then they are on the long slippery slope!

boiledbeefand carrots
Guest
boiledbeefand carrots

The other currencies in the region are not as volatile as the Hungarian forint as they lack its huge imbalances, the budget and current account deficits in the case of Poland and the Czech Republic, while the Slovaks are to join the euro and they too unlike Hungary have sound fundamentals.
They are not so dependent on market funding which is fickle because unlike Hungary’s Socialist govt since 2002 they have created thriving economies which attract vast quantities of foreign investment to finance their current account deficits. Hence the forint trades with the Turkish lira and sells off on general risk aversion, be it headscarves or U.S. data. No one is even looking at what Orban might or might not do and he’s certainly not going to reschedule Hungary’s debt.

Odin's lost eye
Guest

Prof Balogh
*** “And since the forint went even higher. Last time I checked it was 248.184 to the euro. There must be some explanation outside the general economic woes.” ***
There may be it is the price of cerials on the world market!

Te Jó Ég!
Guest

Most tessék megmagyarázni azt, mit történt:
http://www.portfolio.hu/en/cikkek.tdp?cCheck=1&k=3&i=15091
Orbán mondott valamit?

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