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Hungary for a loan? Forint fed by EU talk speculation Apr 27 at 16:20 GMT

Hungary for a loan? Forint fed by EU talk speculation

The Hungarian forint has made further gains after breaking through a support level on Wednesday thanks to the promise of new loans from the European Union (EU) and International monetary Fund (IMF). After a series of disputes between Hungary and the EU which lasted a grueling five months, the confederation opened talks about the possibility of aid after a shift in the Hungarian perspective.

“Before the end of June”

Antal Rogan, who sits at the head of the ruling Fidesz party, has spoken of the possibility of a deal being struck before the end of June. The sooner-than-expected deal has driven up forint and defied top forex broker and analyst expectations of a prolonged Q3 debate.

The suggestion now is that ta deal for around €20bn will be sought by the debt-laden Eastern European nation. This is purely speculatory of course, Minister Tamas Fellegi, who is in charge of negotiations with lenders, declined to give a figure to reporters when questioned on Wednesday.

"In 2008 the government thought it would take out a 7-10 billion euro loan whereas the IMF experts decided on double that amount," Rogane told private broadcaster TV2 early on Thursday.

"In contrast to that this will be definitely smaller".

But despite the upbeat nature of forex news reports coming out of the discussions, many analysts are recommending a cautious approach for potential investors. "The go-ahead came after Prime Minister Viktor Orban scaled back attempts to exert control over the central bank” said Danske Bank. “But a lot of things can still go wrong and we still recommend utmost cautiousness with long HUF positions.”

Fitch downgrade threat

One of the most damaging potential risks still facing the nation is the prospect of a Fitch downgrade if financial aid is not forthcoming. Whilst opening the talks is a positive step forward, it is not equal to an agreed financial package which could lift the Eastern European country out of its current debt/GDP ratio of 80 percent and repair its international reputation from the “junk status” declared by Moody’s late last year.

Yields on Hungarian 10-years have been as high as 9 percent recently and still hover above 8% percent, way above even the Spanish yields which were making headline earlier this month. Such a dire economic start point from which to negotiate has many traders feeling cautious about the forint’s current performance. "I think a few days will have to pass now, many in the market are licking their wounds. For the time being it seems there is a slight strengthening today but it's fairly quiet," a fixed income trader in Budapest said.

By 1120 GMT the forint EURHUF= was 0.3 percent up at 287.7 per euro, a rise of almost 4 percent since Monday and reaching a two-month high earlier in the session.

Fed growth

The other forex news issue which may be skewing the picture of strength shown by the forint is the US Fed’s assurance that it would stand by its promise to support domestic growth. Bernanke’s dovish approach has also benefitted other high-yielding emerging market assets such as the zloty.    The zloty EURPLN= briefly touched a 1-week high of 4.17 before retreating slightly. And "it seems that the zloty may head towards 4.1600-4.1650," a Warsaw-based trader said.

Despite the Polish central bank’s claim that inflation had been high for too long and the country’s moderate slowdown was forcing lawmakers to consider higher interest rates, the predominant speculator mood suggests that rates will hold until at least May. After which we can expect a hike of the current rate of 4.5 percent.

Meanwhile, Hungarian bond yields dropped by up to 15 basis points. The debt management agency sold 45 billion forints ($207 million) worth of bills at an auction on Thursday. 

Sarah Cox, Staff Writer

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