Forint Gains on European Bank Tests, Bets IMF Talks Will Resume

The forint strengthened against the euro, paring last week’s losses on speculation Hungary will resume talks with the International Monetary Fund while European stress tests added to optimism about the global recovery.

The currency jumped as much as 1.2 percent and was trading up 0.7 percent at 285.89 per euro as of 10:50 a.m. in Budapest, making it the best performer among more than 20 emerging-market currencies tracked by Bloomberg.

The forint lost 2 percent last week after the IMF and the European Union suspended a review of Hungary’s bailout program and two ratings companies put the country’s credit rating on review. Stocks in emerging markets advanced for a fifth day and most currencies gained after South Korea’s economy grew faster than expected in the second quarter and most European banks passed stress tests.

“The forint’s move to 285 may be triggered by higher risk appetite” as “we see some relief after the banking stress tests,” Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt, said by phone today. “Levels between 280 and 290 still imply that the negotiations will not fail. The market expects that there might be a delay, but in the end the government will give up and accept the IMF and EU terms.”

Hungary obtained a 20 billion-euro ($25.8 billion) credit lifeline from the international lenders in 2008 to avert default after demand for its debt dried up amid the global financial crisis. Standard & Poor’s said on July 23 it may cut the rating for the country’s debt to junk because without IMF aid the country may “face higher and more volatile funding costs.”

“If the market were to come to the conclusion that talks could break up totally we would see rates far above 300” per euro, Karpowitz said. “The upside potential for the forint is very much limited” by the uncertainty surrounding Hungary’s lending program, he said.

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