Sunday, October 24, 2010

FX market update : Review: Profit taking, but the forint holds up well

The outlook for more quantitative easing from the Federal Reserve did not help the EMEA currencies and all the currencies in the region that we track ended the week weaker. This is the likely result of profit taking after a rather strong rally during September and early October.

The worst performing currency over the past week has been the South African rand. In view this is only natural given the fact that the rally in the rand this year has been completely with foundation in economic fundamentals and we continue to believe that the rand is strongly overvalued. Therefore we would certainly also be looking for more weakness in the coming weeks and months for the rand.

At the other end of the scale is the Hungarian forint among the top performers of the week. In last week’s edition of EMEA Weekly we argued that it might be time to turn more bullish on the forint. We take this argument to the next level this week and in that connection it is also notable that the forint in fact now is the highest scoring currency among the seven currencies covered by our EMEA FX Scorecard. See also our Special on the political discount on the forint on page 9.

Preview: 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 forecasts on.

At the other end of the scale is the Turkish lira that now scores the most negatively in the EMEA FX Scorecard and the score on the lira has not been this negative since March 2010. So even though overall we remain upbeat on the outlook for the Turkish economy, we are nonetheless worried that in the next 12 months we could see a larger correction in the lira. The timing on such a correction is rather uncertain, but especially because we consider the lira to be highly overvalued on a fundamental basis we could be heading for a major correction – even in today’s yield-hunting environment.

Full report: FX market update : Review: Profit taking, but the forint holds up well

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