Wednesday, January 20, 2010

Leu to Beat Forint on Growth, Morgan Stanley Says

By Piotr Skolimowski

Jan. 19 (Bloomberg) -- The leu may strengthen about 7 percent against the forint within three months as Romania’s economy outperforms Hungary’s and its interest rates remain “more attractive,” according to Morgan Stanley.

Investors should buy the leu against the forint, Gyula Pleschinger, an emerging-market strategist at Morgan Stanley in London, wrote in a note to clients today. The exchange rate may move toward 69-70 forint per leu “over the next quarter,” according to the bank. The leu fell 0.1 to 65.065 per forint as of 5:10 p.m. in Bucharest.

“Romanian growth will clearly outperform Hungary in the coming years,” Pleschinger wrote. The so-called carry-trade in the leu is more attractive than in the forint, while central bank support for the leu in the market is more “currency friendly.” he wrote.

The pace of Romania’s economic contraction slowed in the third quarter to an annual 7.1 percent from 8.7 percent in the second quarter, with most of the improvement coming in manufacturing. The economy will probably grow 1.3 percent this year, according to the International Monetary Fund.

Romania’s central bank unexpectedly cut its main interest rate this month to 7.5 percent, still the highest level in the European Union, signaling policy makers’ confidence that political turmoil is easing and boosting the outlook for recovery. Morgan Stanley predicted the rate will drop another 1.25 percentage points by the end of the year.

Rate Outlook

Hungary has reduced its key rate by more than a third in the past six months to revive the economy. The benchmark rate is now 6.25 percent. Morgan Stanley forecast another 0.75 percentage-point cut in the easing cycle. The economy contracted an annual 6.7 percent last year, the most since 1991, and will probably keep shrinking this year, government estimates show.

Romania’s lawmakers in December approved a new government and last week passed an austerity budget that may pave the way for the resumption of a $29 billion international bailout loan. Hungary, the first EU member to obtain an international bailout in 2008, holds parliamentary elections in the second quarter of this year.

“Political risk abated in Romania after the swift formation of the new government, while the pre-election trading environment could still be noisy in Hungary,” according to Morgan Stanley, which changed its stance on the leu versus the euro to “constructive” from “neutral.”

To contact the reporter on this story: Piotr Skolimowski in Warsaw

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