Tuesday, February 26, 2008
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?!?!?!