Economy 8 April 2015, 3:17pm

INSTANT VIEW: Proceed with caution in Hungary forint market - Morgan Stanley

Portfolio

The Hungarian forint could make further gains vs. the euro in the short run, however a risk/return analysis dow not show the currency as attractive on a mid-term horizon, Morgan Stanley said in a research note on Wednesday. The report identifies 295 as the next milestone for EUR/HUF trade.

Morgan Stanley's emerging market strategists have commented on recent developments in the forint market in a research note on Wednesday, arguing that the the move in EUR/HUF is "not chasing" any lower.

"EUR/HUF has continued to fall at a fast pace, having moved convincingly below 300 with the next key level at 295. The recovery in HUF has been helped by an improvement in fundamentals amid a still weak EUR and no large widening of peripheral European bond spreads. Also supporting HUF has been increased signs of European reflation, which has also fed through into Hungary's CPI readings which were higher than market expectations for the second consecutive month at -0.6%Y for March, and our economists think inflation will turn positive over the coming year."

"We think HUF can continue to trade well in the very near term, but do not see good risk/reward in entering medium-term short EUR/HUF positions at current levels, given risks surrounding the external environment and dovish domestic monetary policy. Indeed, while HUF benefits from a robust current account surplus, we do not think the flow story can be taken in isolation from the vulnerability that stems from high foreign participation in the local bond market and more challenging market liquidity at times of global market volatility. This can be a source of HUF volatility should there be another period of EM weakness in coming months related to either US data or potential Grexit. The IMF Article IV assessment of Hungary’s external position argues that the current account norm should be higher to strengthen Hungary’s balance sheet. As such, while the recent trends in data are supportive of near-term HUF gains, we are cautious about its sustainability given the potential for bond market volatility."