The Hungarian forint’s foreign exchange rate has fallen 9 percent in the last month from its early September foothold of 270.198 forints to the euro and continues to be more volatile than its contemporaries, being the Czech Koruna and Polish Zloty.
It also has bad fundamentals – Hungary has roughly $21.2bn in foreign debt, much of it denominated in Swiss francs, which left the country exposed to the franc’s sharp appreciation in the summer.
But some forex traders are starting to believe that the sell-off has gone too far, while others believe that the central bank could intervene – making the forint our trade of the week.
The smart play, market strategists said, is a euro/forint trade selling a €325 call and buying a €290 put option. This involves an investor buying a put , the right to sell at a certain price on a certain day, for €290 if they think the euro will fall against the forint. They can finance this by selling a call, the right to buy at a certain level on a certain day, at €325.
This is known as a “risk reversal” trade because the expectation is that the eur/huf exchange rate will move below 290, at which point you can start to make money.
The trade is based on the likelihood that the National Bank of Hungary will step in to either purchase the currency or increase interest rates if the rate moves towards 320. Intervention should then limit the forint depreciating further and – if risk appetite improves – the put will increase in value.
Commerzbank’s Peter Kinsella is one FX strategist who believes the decline has been overdone.
He said: “The forint suffers during times of market uncertainty and risk aversion and, like other emerging market currencies, comes under pressure.
“However, the high risk surrounding the currency could be overdone. Global risk aversion is the main negative factor for the forint and if risk appetite improves then there is a chance of a short squeeze to the downside.”
Guillaume Salomon, emerging market strategist at Societe Generale, believes the central bank will intervene.
He said: “The outlook for monetary policy in Hungary is obviously highly linked to global market developments and the performance of the forint. Another 5 percent weakness in the currency and aggressive rate hikes will probably be on the cards.”