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Forint becoming a favoured carry trade currency

October 18th, 2017

The leading online economic news outlet points out that as a result of a long series of interest rate cuts by the Hungarian National Bank, the Forint has become a popular carry trade currency. 

The Hungarian Forint may become the next Swiss Franc, Károly Beke writes in an obvious overstatement on Portfolio.hu. He reports that the practically zero per cent interest rates have made the Hungarian Forint a popular currency in carry trade transactions. He goes on to explain that investors take up low interest rate loans in Hungarian Forint to finance higher yield investments in the financial markets. Among others, they use practically zero-interest Forint loans to buy 10-year Hungarian treasuries that yield 2.5 per cent. These transactions tend to weaken the Forint in the short run, but if investors close their positions and start buying Forints in order to pay back their loans, the Forint may fast appreciate, Beke explains. If that happens, the Hungarian Central Bank will have to intervene in order to dampen the appreciation pressure on the Forint by introducing an exchange rate cap similar to the one on the Swiss Franc or the Czech Crown, Beke concludes.