Forint extends biggest rally as foreigners return

Investors flocked back to the highest-yielding bonds in the European Union last week, adding Ft 83.5 billion ($391 million) the past two sessions, the most in more than two years. The forint is rebounding from June, when concern about the government's deteriorating budget gap and a debt-rating cut by Standard & Poor's made it the world's worst performing currency. "Investors regained some confidence" after the rate increase, said Richard Segal, head of research in London at Argonaftis Capital Management, which manages $750 million, almost all in emerging markets. "Even though the fundamentals are still quite poor, capital inflows will overwhelm." After the forint posted its biggest two-week advance ever against the euro on July 28, just one of the 13 investors, strategists and traders surveyed by Bloomberg News from London to Budapest recommended selling the currency this week. Eleven advised holding it and one said to buy. Segal said the forint may advance as far as 265 per euro this week, the strongest since June 12. The currency traded at 272.39 per euro at 4:33 p.m. in Budapest, from 272.02 on July 28. At the end of June, the currency hit a record-low 285.15.

Policy makers lifted their main rate by half a percentage point a week ago to 6.75%. The bank said in a statement that it planned to take action against inflation "in several steps by raising the benchmark interest rate." "I have the forint on hold, still simply because of the return," said Radomir Jac, chief analyst at PPF Asset Management AS in Prague. "I am not saying that the picture in Hungary is rosy,” he added, referring to the budget gap, but „you are less worried when you have almost 7% yield." Hungary's five-year government bonds yield 7.69%, or 4 percentage points more than German government debt with a similar maturity. The gap averaged 3.59 percentage points since the start of the year. The currency has recouped more than half its losses in May and June. The declines began as investors deserted emerging markets on concern U.S., European and Japanese central bank rate increases would slow the world economy. The forint underperformed other emerging markets because of investors' concern about the country's widening budget deficit.

Prime Minister Ferenc Gyurcsány's government loosened its 2006 budget gap target twice in less than two months. The government now estimates the shortfall will reach 8.6% of gross domestic product this year, compared with the original goal of 4.6%. S&P lowered Hungary's foreign-currency debt rating to BBB+, the third-lowest investment grade, on June 15. The recent gains in the forint came from „speculative capital,” said Marcin Turkiewicz, a currency trader at BRE Bank SA, Warsaw, Poland's biggest investment bank. "Any negative news now will result in just as intensive capital flight." Turkiewicz recommends selling the forint and expects it to drop to 275 per euro this week. A deeper deficit in the country's trade balance in the Aug. 2 trade report may spur declines in the currency, he said. (Bloomberg)