Thursday, December 22, 2011

Today's Major Market Move: Hungarian Forint Weakens 4.6% Versus the US Dollar This Month

Back on November 30th when there was a coordinated central bank action to reduce the cost of dollar funding, we speculated that the struggling Hungarian economy might have been the main impetus for the timing of that event. An excerpt from that post:
Its sovereign credit rating was recently downgraded to junk by Moody's. The Forint had weakened 30% this year vs. the dollar and its credit default swaps are the 7th highest priced sovereign CDS of the ones we track (look at the 2nd table in this post). With today's global economy teetering on the edge even a country like Hungary, with a mid-sized GDP of $130 billion (according to the IMF), has the potential of setting off a damaging shock wave. When you add in the fact that the banking systems of several Eurozone countries (some like Austria, Italy and Belgium have plenty of their own problems) are dangerously exposed to the Hungarian economy, one can see why the global financial powers would want take aggressive action to avoid a complete Hungarian collapse.
The Hungarian economic metrics are at or approaching those pre-November 30 levels. The Forint has weakened 4.6% against the Dollar this month and the USDHUF is on the verge of a new 2011 high:

Click here to go to the live chart.

The benchmark Hungarian equity index, the Hungarian Traded Index, is close to the 2011 lows  (8% away):

Click here to go to the live chart.

And the Hungarian 5 Year CDS is trending towards the 2011 highs:

Click here to go to the live chart.
S&P followed in Moody's footsteps and downgraded Hungary's debt to junk on Wednesday. Hungary's president has been in talks with the EU and IMF regarding additional financing but they've yet to reach an agreement. The EU and IMF want Hungary to rescind a couple of laws, one regarding central bank independence and the other that put into place a flat tax. There's a pretty good game of chicken going on. Some more color from Reuters:
"But there is also a risk that Hungary's government will try to soldier on without outside financial support, instead turning to more unorthodox policy measures," it said.

The opposition Socialists have called on Fidesz to replace [Hungary's president] Orban, but political analyst Zoltan Kiszelly said Orban's big majority in parliament cemented his position.

He said Orban was unlikely to change course at this stage as he needed a good political exit strategy to be able to make such a marked shift in economic policy.

"He is hoping that the other side (the EU) would swerve first," he said.

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