CEE: Buy EUR/HUF

Mon, Feb 18 2008, 13:44 GMT
by Lars Christensen, Lars Rasmussen

Danske Bank A/S


We recommend buying EUR/HUF for the following reasons:

  • • The Hungarian government is planning to loosen fiscal policy as a response to the very low growth in the Hungarian economy. Even though tax cuts in general should be welcomed, it is problematic that the planned tax cuts are unlikely to be financed by similar cuts in public finances. Therefore any loosening of fiscal policy is likely to lead to a weakening of the forint and higher yields and rates. Furthermore, a loosening of fiscal policy could very easily lead to a downgrade of Hungary from one or more of the credit rating agencies.
  • • In addition, we recently received more evidence that the Hungarian economy is sliding into stagflation – high inflation and very low growth – see Flash Comment - Hungary: Stagflation – dilemma for MNB, 14 February. Such a scenario is not likely to benefit the Hungarian forint.
  • • Since the outbreak of the global credit crunch in August 2007, most currencies in most of the EMEA countries with large current account deficits and / or large foreign debt have been under significant selling pressures. Most notable have been the weakening of the Romanian leu, the Icelandic kronur and the South African rand, which have all weakened around 15% since the beginning of July. While we clearly see a risk that these currencies can weaken significantly more, there is also a risk that this weakening will spread to other EMEA economies with similar problems. In particular, the Hungarian forint stands out – see Flash Comment - Hungary: Time to watch the forint, 12 February.

Published on  Mon, Feb 18 2008, 13:47 GMT

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