Why shorting the forint might be a good idea
The nomination of a new central bank governor in Hungary means that the forint is likely to depreciate, according to one strategist
Hungary's central bank governor Andras Simor drew laughter and applause at a recent Euromoney Conferences banking panel in Vienna when he introduced himself like this: "I am the governor of the central bank of Hungary, I have been coming here for six years and this is probably my last year."
Simor's fight for independence from the Hungarian government's attempts to influence monetary policy is well known and has earned him Emerging Markets' Emerging Europe Central Bank Governor of the Year award in 2010.
His departure could mean a change in monetary policy towards a more dovish approach, and the Hungarian forint (HUF) could suffer as a result, Guillaume Salomon, a strategist at Societe Generale, said.
"We believe that the nomination of the new NBH governor could result in more easing, probably beyond the markets current expectations," Salomon wrote in a market note.
"At the same time, we believe that the forint could be allowed to weaken quite significantly from here to try and bolster the economy. This will result in an implicit weakening of the NBHs inflation mandate."
Simor's six-year term ends on March 3 and Finance Minister Gyorgy Matolcsy is seen by the Hungarian media as the favourite to replace him.
Salomon drew attention to a column in the Hungarian Heti Valasz paper, in which Matolcsy wrote that Hungary must reject traditional economic models including policies of previous governments that kept the forint 'strong' to suppress inflation and allowed the budget deficit to widen.
RELAXED TOWARDS INFLATION
"Firstly we believe that these comments were not made erroneously but are rather designed to bolster his bid to be the next governor of the NBH" and they could be guidelines on Hungary's future monetary policy, Salomon said.
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" This shift in attitude could see the council take a more 'relaxed' attitude towards inflation targeting and be more willing to tolerate currency weakness, something that the 'older guards' of the NBH were much less willing to tolerate."
Hungarians borrowed large amounts in foreign currency, notably Swiss francs and euros, during the boom years and this has made some analysts to argue that the government would not tolerate too deep a depreciation of the forint.
But Salomon remarked that the Hungarian government has managed to transfer exchange rate risks to banks before, forcing them to accept reimbursements of the loans at much stronger rates of the forint than the market ones, and it could transfer the risk once more.
"If our above concerns become validated, we fear that the end result will be an underperformance of the HUF on an outright basis but also relative to its EMEA peers," he said.He recommends that investors be long euro (EUR)-forint but also Romanian leu (RON)-forint and Turkish lira (TRY) forint.