The Hungarian FX market finally got what it has been waiting for

The Hungarian FX market finally got what it has been waiting for. Results of the first round of the parliamentary election are already available and it must be said that there are clearly market positive – at least for the two reasons. First, the ruling Socialist are leading as they gained 13 mandates more than its more populistic opposition rival FIDESZ (for more see the News section). Secondly, both of small parliamentary parties – the Free Democrats and the Hungarian Democratic Forum – have passed the 5% threshold. Hence, even thought the election fight is still far from over, the most market friendly election scenario - a new four-year mandate for the current coalition of the Socialist and Free Democrats - looks more likely after the first round.

Thus, good news for the forint but will it be enough for a change in the market sentiment, which has been even more bearish after Friday’s strong pay-rolls and another jump in US and EMU yields? Moreover, the government is going to release the preliminary March public budget data this afternoon and as several reports in local press indicated that the targeted deficit would be overshot by a huge margin (between HUF 80bn to HUF 100bn). So the market might get nervous, despite the positive outcome of the first round of the elections. Hence, it is quite possible that after an initial positive correction the election results will be overshadowed by other factors including worsening of the market sentiment in emerging markets (implied by higher yields in core markets) and the release of the March public budget figures (though the poor outcome has been mostly priced in).

So, we expect a very volatile session today, while the EUR/HUF should dip in early trading as an reaction to the election outcome, but later on the factors mentioned above might have a stronger impact and any forint gain’s could be erased. However, even if EUR/HUF turns north, it is no likely that it will go back to test the strong psychological resistance standing at 270 today.

(CSOB - Investment research)