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The Hungarian forint lost all its previous gains and the EUR/HUF parked back above the 250 level

27.1.2006 10:22
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The Hungarian forint lost all its previous gains and the EUR/HUF parked back above the 250 level. A trigger for currency weakening was S&P’s decision to lower outlook of Hungary’s sovereign rating from stable to negative (for more see the News section). First of a ll we should stress that a recent rating downgrade from the Fitch rating agency, yesterday’s S&P decision was not a real surprise for the market. That is why the forint reaction was relatively modest and the unit lost less than 0.5% against the euro. Technically, the 251.0 worked as solid resistance for EUR/HUF. Forint lost ground as S&P gives negative outlook on sovereign debt Regarding the S&P updated rating assessment: we can almost fully agree with all arguments, which were put forward. In our view the agency sounded even too pessimistic, mainly as concerns its fiscal outlook for Hungary. The agency, for instance, expects that the budget deficit will spike to 10.7% of GDP in 2006 and debt-to-GDP ratio will reach 69% of GDP in 2009.

Obviously, given such a poor fiscal outlook Hungary can not count on its EMU entry in foreseeable future. S&P estimates that the euro adoption will not happen in Hungary before 2014. Today, the forint will further digest the downgrade of the sovereign rating outlook and its future consequences. The bearish tone of the market could be also elevated by ongoing sell-off in core bond markets. This might further hurt the high-yielding forint, which still relies on a high interest.-rate differential.

(CSOB - Investment research)

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