City: Investors increase short Forint positions despite Forint surge


Global portfolio investors increased short Forint positions in May, JP Morgan said in its latest survey released in London on Friday.

In the May issue of its monthly emerging markets foreign exchange and rates weighting index, the investment group said that on its scale ranging from +10 (very overweight) and -10 (very underweight), short Forint positions became shorter by 0.1 this month to -1.3, despite the bounce in the Forint. In the May survey that generated 168 responses from investors managing $399 billion of emerging market fixed income and FX assets, JP Morgan said, however, that it sees increasing risks that its 260 forecasts for EUR/HUF for Q2 and Q3 this year are too bearish, even though political risk and volatility around global growth expectations remain.

Hungary’s external financing requirement is expected to drop to around 3.5% of GDP this year, with net FDI expected to cover more than two thirds of that gap, up from 25% last year. “Our conversations with policymakers suggest the MNB (National Bank Of Hungary) is committed to the inflation target, hence rate hikes are likely should Forint weaken”. Furthermore, the presence of likely option barriers below the old band “could prove a magnet” for speculators and drag EUR/HUF lower. (The strong end of the forint’s intervention band, which was scrapped in February, was Ft 240 to the euro.)

In a separate report, however, Barclays Capital said on Friday that the Forint is now near multi-year strong levels, which “we believe are not justified by financial market indicators or Hungary’s fundamentals”. The Hungarian central bank’s monetary council is “very credible” as, despite the weak economy, it has hiked 75bp this year in response to the continued inflation problems. But the Forint response in the past three months has been “disproportionate” to the hikes and the widening in the Hungary minus euro area yield spreads. The yield spread has widened 100bp year-to-date but Forint appreciated over 8%. This seems “extended”, given that it has taken the Forint to its strongest multi-year levels, even though yield spreads are not at multi-year wides, Barclays Capital said. Investor perceptions of Hungarian fundamentals have not markedly improved, even though the monetary council has proved itself credible in its anti-inflation stance.

Meanwhile, Hungary faces some medium-term fundamental challenges, and the political risks are meaningful, as the ruling Sociality party is trailing in the opinion polls and relies on a former coalition party to get any legal changes through parliament. 2009 budget discussions start in August which could be another source of market unease, particularly if there are hints of fiscal loosening. Thus, “wee see EUR/HUF moving back up to 255 in three months”, Barclays Capital said. (MTI-Econews)

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