We just received a warning from Thomas Fischer at Jyske Bank that the Hungarian currency is collapsing. Read this warning and then let’s see how this can create international investing opportunity soon. Here is Thomas’ message:
“The Hungarian forint is running into a forex storm as the currency has weakened considerably over the last couple of days. We are recommending to cut down or even get out of this currency. The government made a large interest rate hike of 300 basis points (bps) to 12.5% but this did not strengthen the forint up to the 250-260 forints per Euro, as the Central Bank and the government had hoped. This preferred range is needed to reach Hungary’s inflation target for 2005 (4%, +/-1%). The EUR-HUF forex rate is currently trading at about 270 so the
million dollar question is what will the Central Bank do now. Please read below some comments and our recommendations:
*The range does not regard the +/-15% trading range from parity (282.36), but is about the government’s and Central Bank’s preferred trading
* It is a vicious position for a government to try to keep a currency within a trading range when the market is convinced that the currency is overvalued.
* The current situation is not sustainable in the long run as it is prohibitively expensive on business to have such high interest rates that suffocate growth.
* The Hungarian finance minister, Laszlo, mentioned a more “flexible trading range”. The interpretation of his statement can mean various things. More comments are expected this afternoon but the options include:
Devaluation (upward move of central parity) of currency which means that Hungary will have to neglect its inflation targets for 2005 or that a EUR-HUF above 260 can and will be tolerated in a longer time period.
* Further HUF weakening is very possible.
* Additional rate hikes are possible.
A rate hike would support the currency, but a “free float” could indicate 300.00 (depreciation by 10% from 272.00) so chances for rate cuts would rise. If the “free float + rate cut” scenario develops, the long end of the bond yield curve will benefit most regarding capital gains, whilst the short issues will be eroded by currency losses and capital gains will be minimal.
* Clients who cannot tolerate further losses should sell their bonds.
* Clients who are exposed to Hungary in greater extent in their portfolios should reduce their exposure.
“We are heading for extremely volatile times in short- and medium term. Convergence is still continuing but has been slowed down markedly
and my personal worry is that the turmoil may spill over to other (overvalued) currencies such as the South African rand which is currently trading at 6.37 rand per against US dollar. This is a high level not seen in more than 3 years and way off the trading range of almost 12 rand per dollar seen in 2001.”
So be warned! If you have emerging currencies in your portfolio, look at them carefully right now and be ready to or actually reduce your exposure now.
After the turmoil, here is where the profits will come in. When using Borrow Low-Deposit High tactics you want to find currencies that have a high interest rate but are weaker than they should be. Normally during these times of currency volatility some currencies become oversold. Let’s say for example that the Hungarian forint drops way below 300 forints per Euro and the interest rate remains at 12.5% This may become the time to borrow Swiss francs (which are linked to Euros) and invest the loan in Hungarian forint long bonds. This will create great capital gains as well as positive carry potential. This is NOT the time yet though. Wait, watch and stay tuned.
If you have questions of Thomas Fischer, you can reach him at FISCHER@jyskebank.dk
More on this tomorrow. Until then, you may want to take a look at the free correspondence course International Currencies Made EZ at https://www.garyascott.com/currez/index.html
Good investing to you!