Feb. 2 (Bloomberg) -- The forint, the world’s best currency performer this year, slid from the strongest against the euro in 3 1/2 months on speculation its rally was overdone as the country struggles to restart talks on a bailout package.
The Hungarian currency weakened as much as 1 percent and traded 0.2 percent weaker at 291.06 per euro by 4:46 p.m. in Budapest. The forint earlier today added as much as 0.4 percent to 289.40, its strongest since Oct. 13.
The forint’s 8.4 percent rally against the euro this year through yesterday, the biggest of all currencies tracked by Bloomberg, lifted the 14-day relative strength index for forint- euro to 72 at yesterday’s close. Readings above 70 suggest to technical analysts an asset may drop. The RSI last traded at 71.
“The forint extended an unprecedented strengthening from January, but on a technical level the currency is substantially overbought,” Levente Blaho and Adam Keszeg, Budapest-based analysts at Raiffeisen Bank International AG, wrote in a report today. “We can’t see any reason for such a big rally. It looks like the market put on its rosiest glasses.”
Hungarian assets rallied after Prime Minister Viktor Orban said on Jan. 5 he was ready to discuss conditions needed to achieve a “quick” deal with the International Monetary Fund and the European Union on a bailout package. Talks had broken off in December after Orban refused to change laws the international organizations said threatened the independence of the central bank.
“The government’s communication strategy is causing huge swings in the forint’s exchange rate and bond yields,” Gergely Suppan, an economist at DZ Bank AG’s Budapest-based Takarekbank unit, told reporters today. “It’s rather unpredictable what their latest plan is, which unnerves investors.”
Hungary, the European Union’s most-indebted eastern member, lost its investment-grade credit ranking at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings between November and January. Hungary’s public debt stood at 82 percent of gross domestic product at the end of the third quarter, according to central bank data.
“Hungary’s Achilles heel is their debt and budget,” Gabor Ambrus, a strategist at 4Cast Ltd. in London, wrote in a research report yesterday. “We would caution against expectations that what is now a three-times junk country can attract the sort of bond inflow it attracted last year,” Ambrus said, adding that investors should be “cautious” on the forint.
The amount of Hungarian treasury bonds and bills held by foreigners rose 46 percent last year, the biggest yearly jump on record, according to data from the Debt Management Agency on Bloomberg. The yield on the government’s 10-year bonds fell to 8.79 percent today, after rising as high as 10.69 percent on Jan. 5., according to generic prices compiled by Bloomberg.
While Romania sold $1.5 billion in its first dollar debt sale this week and Poland raised $1 billion in 2022 notes last week, Hungary’s Debt Management Agency said in December it would wait until the end of IMF talks before selling foreign-currency debt.
Hungary may be able to sell Eurobonds before the formal closure of IMF talks once the price of insurance against default on Hungary’s debt with credit-default swaps falls below 400 basis points, Takarekbank’s Suppan said.
The CDS contracts fell two basis points to 570 basis points today, compared with a record high of 735 basis points on Jan. 5. The CDS traded at around 240 basis points in May when Hungary sold 1 billion euros of 2019 bonds.
“It all depends on trust,” Suppan said. “Whether a default and a financing crisis can be avoided depends on the trust of investors. Technically, we wouldn’t even stand a chance of defaulting, we are in a much better situation than Greece or Portugal.”
--Editors: Linda Shen, Peter Branton
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