Tuesday, February 26, 2008

I'll HUF and I'll puff and I'll blow your peg down

Oh, those crazy Magyars! While the attention of the financial world has been focused on the currency pegs in China, Russia, and the Middle East, the latest shoe (or should that be peg?) to drop was in Hungary, where the National Bank announced yesterday that the forint band was to be dropped with immediate effect, and that henceforth the HUF would be permitted to float freely.

This action was taken in lieu of the widely expected interest rate hike, and prompted a sharp short-term rally in the HUF (i.e., a sell-off in EUR/HUF), as depicted below. By way of background, the HUF has been pegged against the euro since 2001, and since 2003 that peg has been centered at 282.36. However, the NBH has allowed the HUF to fluctuate 15% either side of its parity, which meant that it maintained a commitment to prevent EUR/HUF from falling below 240.
So in a sense, yesterday's sharp sell-off in EUR/HUF made a bit of sense- after all, the downside of the expected return distribution has been fundamentally altered. On the other hand, it's only the very left-hand side of that distribution- surely not enough to merit a 1.5% sell-off in EUR/HUF? After all, recent levels in spot have been comfortably removed from knocking on the door of the edge of the forint band, so Macro Man struggled to see why yesterday's announcement was so bullish HUF.
After all, wanting a strong(er) currency is one thing, but getting one is something else. Of course, that may miss the point. Perhaps the authorities don't want a stronger currency....and have simply waited until the forint peg was irrelevant to the market's calculus before scrapping it. If so, then it's a job well done, particularly as it should now allow the NBH to maintain a more consistent monetary policy, rather than threatening to cut rates every time EUR/HUF dips below 250.

Perhaps the GCC are waiting for a similiar opportunity to scrap or adjust their pegs. Unfortunately for them, the inflationary opportunity cost of waiting is much higher than it ever was for Hungary. With oil just under $100/bbl and OPEC muttering about production cuts, it's hard to see that changing any time soon.

Elsewhere, equities enjoyed another late-session melt up courtesy of more monoline news. Is it just Macro Man, or does there seem to be a conspiracy to spin good news about these guys every day or two, simply to ensure that they are not the straw the breaks the market's back? While your humble scribe is admittedly not a credit analyst, he struggles to see how S&P could have concluded that everything is hunky-dory at MBIA and that the firm no longer merits being on credit review. Isn't closing their eyes to obvious turds how we got into this mess to begin with?!?!?!


Peter said...

im sharing your surprise with the REACTION to the Hung Cen.Bank's move

so im off to eating my hunble pie this morning, being a payer in HUF rates (5yr) on the basis of the persistent inflation, and long EURHUF on the basis of their large external financing need in a world where higher volat. should translate into a higher price to fund these deficits.

as far as I can see, yday's move does nothing to solve any of these, it might have helped create a feel-good factor short term but I dont see much benefit beyond that:

aah.. and on top of the lack of savings/current account problem and inflation problem they have a referendum coming up which will throw sand in the wheels of the much hyped fiscal consolidation that they undertook half-heartedly.
the govt is so unpopular that we can surely count on the fiscal leach being loosened especially with growth having disappointed in H2'07 and unlikely to suddenly spring to life

Charles Butler said...

Welcome back, MM. Equity index analysis gets right pissed up by an event like SocGen's housecleaning. Note that markets are just approaching the top end of the range marked by the Martin Luther King Day gap and the low the morning after. Whether the continued tossing up of bright ideas, later to go nowhere, can avert the arrival of bad news I can't say. But the 10% drop attributable to the de-Kerveiling makes a pretty cushy airbag for the time being.

Winter? I don't think it's gotten below 6ยบ this year.

a5000 said...

SP upgrade of ABK, MBI is just outright fraud.

This is our government though -- they used to hide fraud (like when developing reasons to invade Iraq).

They've evolved to the point where they now commit outright fraud without even attempting to cover their tracks -- realizing correctly that no one can do a thing about it and the public is too ignorant to realize all the games will eventually lead to spreading the risk to taxpayers in the end.

Peter said...

wow... equities are amazing
you can throw philly fed, ISM, consumer confidence data all at multi-year lows at it.. and it goes up.
where would it be if the data were actually good ????

this will end in tears

Anonymous said...


mess, what mess?

morals man, as u bein a yank, i feel its apropriate to inform u that hungarians r a shrew bunch. they r significantly overrepresented in the math field.

go figure...