Forint Gains to 3-Month High as Goldman Ends Sell Recommendation

The forint rose to the strongest in three months, spurring Goldman Sachs Group Inc. to close its trade recommendation to sell Hungary’s currency against the euro at a loss after the economy emerged from recession.

The forint appreciated as much as 0.6 percent and traded 0.1 percent stronger at 289.21 per euro by 5:04 p.m. in Budapest, the seventh day of advances and extending its gains in the second quarter to 5.2 percent, the best performance among 31 major currencies tracked by Bloomberg. Goldman said on April 18 that the forint may weaken to 310 per euro, recommending that investors close the trade if the exchange rate strengthens past the 290 level.

The economy expanded 0.7 percent in the first quarter from the last three months of 2012, the first quarterly growth in more than a year, the Central Statistical Office said on May 15. The expansion in output also supported Prime Minister Viktor Orban’s efforts to meet EU budget targets and exit the bloc’s excessive-deficit procedure this year, which would avert the threat of cuts in development aid.

“We clearly underestimated the degree of risk premium for weaker economic outcomes already embedded in the currency,” Goldman analysts including Thomas Stolper in London wrote in a research report dated yesterday.

‘Positive Catalysts’

The “strong GDP print” and a “smooth outcome in the ongoing budget negotiations with the EU,” emerged as “positive catalysts” for the forint as the extra yield on Hungarian debt over U.S. treasuries declines, the analysts said.

Yields on Hungary’s benchmark 10-year forint bonds were little changed at 5.06 percent today after reaching a record-low 4.93 percent last week. Yields on U.S. Treasuries of the same maturity rose four basis points, or 0.04 percentage point, to 1.97 percent. Hungary’s central bank cut its benchmark rate for a ninth month to a record 4.75 percent on April 23.

Goldman said last month that the forint would weaken on the narrowing rate premium and as Hungary’s policy makers tolerate a weaker forint level.

“Our broader fundamental view has not changed, but having just hit our recommended stop of 290, we recommend closing the position,” the Goldman analysts said. The trade incurred a “potential 2.86 percent loss including negative carry of about 32 basis points in total,” the analysts said.

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