Hungary Takes Us Back to the Future

Those of us who traded Foreign Exchange in the early 90s will have noticed something familiar today. A country is attempting to fend of a speculative attack on its currency by raising interest rates. Hungary, on the edge of the Euro-zone and its current recession, is expecting barely positive GDP growth this year of 0.5% and has policy rates at 7% with expectations that they will have to rise. The risk is that GDP will be lower than expected, and that the central bank will raise rates higher. Inflation is currently running at 4%, but that is not the main problem facing the country.

Hungarian homeowners took out mortgages in Swiss Francs because interest rates there were lower than domestic ones. Unfortunately, the Swiss Franc has appreciated against the Euro beyond all expectations as investors have fled the Euro (a currency and region with whom Hungary’s shares an almost umbilical attachment). So the debt owed by many Hungarians has soared in their own currency, since the Forint has also weakened against the Swiss Franc.

Back in the 90s when European countries were attempting to maintain stable FX rates as they proceeded towards eventual monetary union, occasionally they would raise short-term rates when their currency was weakening. It rarely worked; Hungary could double its short term rates and that would scarcely deter an investor seeking to exit the currency – indeed, it might strengthen his resolve given the risk to domestic growth.

So it’s deja vu all over again (as Yogi Berra memorably said). There doesn’t appear to be a Forint ETF to be short, but being short the Euro works nearly as well.

Disclosure: Author is Short FXE

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