One-month implied volatility on the euro/Hungarian forint leaped to 20% last Wednesday, from 8% the week before, while one-week volatility took an even wilder ride jumping to 25% from 7% in the same time frame. Government statements that the forint is not on target for integration with the euro started speculation that the central bank might allow the currency to devalue, noted one trader. Although the central bank has now denied this, the talk set the ball in motion and preceded a 3% interest rate hike that sent the currency into turmoil, he noted. Last Wednesday the euro traded at HUF274, compared with HUF263 the week before.
The shoot up in implied volatility made the trading of options on the currency pair effectively impossible, the trader noted. Even in less volatile times the forint is not liquid. Last week's blow out in pricing left all option activity in a blackhole, he said.
Steve Leach, managing director at Citigroup Global Markets, noted that Hungary has gotten itself into a difficult position, adding that a 3% increase in interest rates does not give the right signal. The rate hike is unsustainable and leaves the market questioning what will come next, which is why there is so much volatility, he said. While the government appears to be pushing for an exchange rate of HUF250-260 against the euro, market movement is saying that more policy measures need to be taken in order to prevent further depreciation of the currency.
EUR/HUF Spot & One-Month Implied Volatility
