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.