Hungary Downgrade Risk Remains Alive, Stay Short HUF
by Win Thin
S&P affirmed Hungary’s BBB- rating but kept the negative outlook in place, signaling that all is not yet clear for the country. We believe that markets have gotten too bulled up on Hungary lately and are overlooking fiscal and downgrade risks that remain in place. Without the IMF program (which expired last month), we simply do not think Hungary has the stomach to stick with aggressive fiscal tightening in the midst of a tough economic backdrop. S&P announcement comes after the government unveiled its 2011 budget, and so the agency clearly has some doubts about the it, citing concerns about Hungary’s structural budget deficit. S&P had put the negative outlook on earlier this year after talks with the IMF collapsed, while Moody’s put Hungary’s Baa1 rating on review for possible downgrade back in July. Fitch has Hungary at BBB. We note that our quarterly sovereign ratings update is about to come out and shows Hungary remaining at a junk level of BB+/Ba1/BB+ vs. actual ratings of BBB-/Baa1/BBB.
EUR/HUF has put in a near-term base around 270 and we think current levels offer value to go long EUR for a move back to the 278 (mid-October highs) and then 282 (62% retracement level of the Sep-Oct drop). We also favor going short HUF vs. TRY and PLN. In the former, we think a near-term low was put in place just below 136 and we look for a move back to 141 (mid-October high) and then 145 (62% retracement level of the Sep-Oct drop). In the latter, a good base was established around 68 and so we look for a move back to 70.70 (mid-October highs) and then eventually 73. We believe the fundamental backdrop for Turkey and Poland is much more constructive than it is for Hungary.