EMEA Weekly : Believe it or not – we are bulls on the forint

Market movers ahead: Polish and Hungarian rate decision

On top of the EMEA agenda next week will undoubtedly be the rate decisions in Poland and Hungary. While the rate decision in Hungary is likely to be relatively “boring” given that all market participants expect the Hungarian central bank keeping the key policy on hold at 5.25%, there is a lot more at stake for the markets when the Polish central bank announces its rate decision on Wednesday. Hence, some analysts still continue to believe that the Polish central bank (NBP) will hike its key policy rate next week and the market is still priced for the initiation of a monetary policy tightening cycle over the coming three months. However, we have long argued that there was no need for the NBP to start a tightening cycle anytime soon and have in fact recently changed our forecast in a more dovish direction and now don’t expect rate hikes in either 2010 or 2011. So next week is unchanged at 3.5%.

Fixed income outlook: Look for dovish Polish central bank
The direction for next week is fairly simple. In our view, the Polish central bank comments after the rate decision will be more dovish than the market expected and we therefore recommend being positioned for lower Polish yields.

FX Outlook: No reason to get overly excited
Despite the continued yield-hunting mode among global investors we believe there is some reason not to get overly excited about the overall outlook for the EMEA currencies. In fact, overall our EMEA FX Scorecard points in the direction of weakness in most currencies. The only exceptions are the Israeli shekel and Hungarian forint.

Most notable is that the long stigmatized Hungarian forint is now the second highest scoring currency in the EMEA Scorecard indicating HUF outperformance on a one to three-month horizon. This is also reflected in our FX forecast and in fact the forint is now the currency we are most bullish on, on three-, six- and 12-month horizons, among all of the emerging markets currencies that we regularly prepare FX forecasts on.

Special: 5% “foot-in-mouth”-discount on the forint
The Hungarian government have certainly not done a good job increasing investor confidence in the Hungarian economy and in economic policy in the general and the forint is today around 5% weaker than it would have been had it not been for “misspeak”, but we also believe that such a discount is not long lasting and it could therefore be time to simply ignore the “political noise” coming out of Budapest. Therefore, we also expect
the forint to outperform its CEE peers in the coming three months.
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