FOREX OWL

Right now, all eyes are on the Greek debt crises and its resolution. However, while all financial eyes are on Athens and Brussels another EU problem is brewing in Hungary. The Hungarian banking crises began during the housing bubble. At the time, the Swiss Franc was pegged to the Euro and it was less expensive for Hungarian banks to fund mortgages with Swiss Francs. After the bubble burst and the Eurozone recovery failed to take hold, the ECB set out to weaken the Euro. The Euro plunged to record lows against major currencies.

In the last quarter of 2014, foreign currency mortgage payments had become increasingly expensive as a result of the MNB’s weakening of the Forint[i]. The populist administration of recently re-elected Prime Minister Orban[ii] ordered banks to refund over £2.66 billion for unfair lending practices. The Hungarian Parliament approved legislation making the refund law[iii]. During this time, the Hungarian National Bank decided to maintain its benchmark at 2.1% set in July of 2014. This was the last of a two year easing cycle. However, the sequential easing weakened the Forint causing foreign currency mortgage payments to edge even higher.

Hence, the Hungarian private sector banking system was already extremely stressed months before the Swiss decoupling from the Euro. It should be noted that the private banking sector is 60% privately owned, (a good portion of that foreign), and 40% owned by the state. So by the end of 2014 as the MNB, the Hungarian government, courts and banks struggled to stabilize the financial sector, unbeknownst to anyone, Hungary was on a head-on collision course with the Swiss ‘Black Swan’ event.

Meanwhile, in a determined last effort, the ECB President Draghi had promised a bond buying program beyond all expectations.  Sovereign yields across the Eurozone crashed through the zero bound. This did not go unnoticed by the Swiss National Bank. The SNB vigorously defended its Euro pegged export economy, swapping Euros for Francs until it was no longer viable. On 15 January, the SNB bailed on the Euro altogether. Not only did the Euro plunge vs the Franc, but so did the non-Eurozone currencies of EU members, such as Hungary. The loans financed in Swiss France became unaffordable, overnight[iv].

Remarkably, the Forint continued to strengthen vs the Euro, from the 15 January 52 week high of 327.67 to the Euro, toward its April low of 295.583 to the Euro; a 9.79% gain. MNB managing director Marton Nagy saw no need for the MNB to respond to Swiss Franc strengthening[v]. It needs to be noted that the MNB ‘base rate’ had last adjusted down to 2.10% in July of 2014. On 23 January the ECB announced its €1 trillion (£719.4 billion) bond purchase program. EUR/HUF dropped from its 52 week high of 327.67 per Euro to support at 309.54, a 5% decline in a week. The yield on the Hungarian 10 Year +BB sovereign bond fell to 2.86% from 3.04%. On 27 January, MNB signaled that although it was maintaining the 2.1% two week deposit rate, that more liquidity would eventually be needed[vi]. A few weeks later, the MNB doubled its bank bailout program to £1.234 billion to stimulate GDP growth. The MNB would resume its easing program 24 March, lowering the two week deposit rate to 1.95%

EUR/HUF finally found support at its 52 week low of 295.583 Forints to the Euro on 15 April and reversed from there. The MNB cut rates again to a new record low, 1.80% on 21 April. It was around that time that the ECB was alerted to possible banking irregularities, announcing that the MNB would be monitored closely for any funding of the government by the MNB; a prohibition under EU regulations. It was stated: “…Given the multitude of programs, their scope and their size, these programs could be perceived as potentially in conflict with the monetary financing prohibition, to the extent that they could be viewed as the [central bank] taking over state tasks or otherwise conferring financial benefits on the state…[vii]”

With increasing GDP and inflation expectations, reality finally reached currency markets and the Forint steadily weakened. More rate cuts followed on 26 May to 1.65% and on 24 June to 1.50%. These cuts were made in spite of increasing inflation expectations. Also, MNB switched its main policy tool 2-week deposit rate to the 3 month deposit rate, effective September 2015.

What are the possible outcomes? No matter how the Greek debt resolution goes it will cost the EU in some way. Most likely the Euro will experience further weakness against other majors. Hungary, on the other hand still has a serious dilemma of its own. It’s now under the watchful eye of the ECB, has a major stake in a troubled banking system whose major stakeholder are foreign. All the while, inflation seems to be accelerating. Further, monetary policy seems increasingly influenced by government policy. The existing plan to swap foreign currency loans for Forint loans, although remarkably successful, is bound to be inflationary at some point. Although, the MNB has given no indication it will reduce the two week deposit rate further, it will have a higher rate to work with when it switches its main policy tool to the 3 month deposit rate[viii].

The question becomes whether the MNB can get ahead of inflation quickly enough, if it should accelerate suddenly. If the Greek-EU standoff is resolved, it will strengthen the Euro at least for a while. If not, a ‘flight to quality’ might make the higher, but risker Hungarian deposit rates a ‘temporary haven’ rather than near zero or negative Eurozone deposit rates.

Mike Scrive

“CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.”

[i] Forbes 29-7-2014

[ii] Bloomberg 12-9-2014

[iii] Reuters 8-6-2014

[iv] BBC 20-1-2015

[v] Hungary Today 22-1-2015

[vi] Bloomberg 27-1-2015

[vii] NASDAQ 20-4-2015

[viii] Bloomberg 2-6-2015

The Swiss franc was once the epitome of reliability, as it was seemingly unshakable due to the control measures instituted by the Swiss National Bank. However, during January 2015 the SNB changed the world of forex forever, when they uncapped the Swiss franc and removed said control measures. Most of the headlines went to the aftermath of such event and the companies that suffered because of it, but it wasn’t just brokerage firms that were hurt. In fact, it was a hedge fund that was clearly hurt more than anyone else from a financial perspective.

Marko Dimitrijevic is known the world over for his aggressive gambles when it comes to emerging markets. He carried this “big risk, big reward” philosophy into Everest Capital’s Global Fund and it clearly proved to be too much risk in this case. The SNB’s decision to restore “free float” to the Swiss franc caused turmoil and tore the fund apart in many ways.

On December 31st, hotly anticipating the New Year, Everest Capital’s Global Fund would enter 2014 with $830 million in assets under its belt. Sadly, this anticipation would quickly be dashed, as the unexpected move from SNB would hammer the fund. Fund operator Dimitrijevic had a risky bet in place that the Swiss franc would fall, but it wouldn’t be long before that bet would come back to bite him. This bet would leave the fund overly exposed to the events that would unfold during January 2015. As the Swiss franc price would sky rocket and show no signs of slowing down, it would strip away pretty much every penny the fund had. After much deliberation Everest decided that the fund was unsustainable. Everest will still operate out of its Miami base, continuing to run and control the firms other $2 billion worth of assets, the majority of which have little to no exposure to the Swiss franc.

The story of Everest Capital’s Global Fund is ultimately one of rise and fall. Starting out life in 1991, the Global Fund earned investors an average annual return of 12.3% after charges, an impressive figure to say the very least. After years and years of consistent success, it has been ended by a single incident of mismanagement. However, Everest Capital’s Global Fund didn’t stand alone in their troubles, as other hedge funds would also suffer. Discovery Capital Management was another firm that were hit hard by the Swiss franc price hike.

When looking back at history, there will be many good things to remember about Everest Capital’s Global Fund. They invested well within Swiss sectors and had no aversion to emerging markets, while they were also willing to take a gamble when necessary. Those who timed their entrance and exit to the fund made good money, but what Everest Capital’s Global Fund will be remembered for most is their ending. Almost $850 million in assets evaporated in a matter of days due to a single global event, an incident that many investors will remember long into the future.

Spreadbetting, CFD trading and Forex are leveraged. This means they can result in losses exceeding your original deposit. Ensure you understand the risks, seek independent financial advice if necessary. The value of shares and the income from them may go down as well as up. Nothing on this website constitutes a solicitation or recommendation to enter into any security or investment.

Alexander Bowring is a London based writer and a Southampton Solent University Screenwriting graduate. He has worked alongside TV personality and Telegraph feature writer Alison Cork, whilst also having produced content for ITV, This Morning, Canvas8, Who’s Jack, Alison at Home, and Bonallack & Bishop Solicitors. Alexander also has a keen interest in investments.