There is an uneasy calm over in Crimea and Russia. It may very well be the calm before the storm. The reality is no one really knows how far Russia is willing to go and defy the West in its quest for dominance in the region and major-player status on the world stage.
Since the crisis broke a couple of weeks ago, we have seen a flurry of diplomatic activities, the usual threats that the West can muster up and a few harsh words from European and world leaders. The reality is Russian President Putin has the situation under his control and will likely annex Crimea. The natural gas and resources of the region are too valuable to pass up and he knows no country has the real will to push Russia back.
Once we all get past the political posturing and token gestures of holding Russia accountable by imposing sanctions, freezing assets and revoking visas, we will accept the reality and move on.
The financial markets are already accepting fait accompli and turning their attention to other stories. The euro has started its appreciation against the U.S. dollar again and the regional European currencies are beginning to show calm as well.
When the crisis broke, we saw a knee-jerk reaction in the regional currencies such as the Polish zloty and the Hungarian forint. They depreciated rather steeply and the initial panic reaction was to sell the currency against the euro and the dollar.
Now that acceptance is setting in, we will see some reversals and strengthening of these currencies.
The Hungarian forint comes to mind not just for this reason, but some of the macroeconomic events occurring within the country.
The National Bank of Hungary (MNB) was expected to not defend the forint and unlikely to raise interest rates before general elections in April. While that has been true so far, we may see a surprise in its policy in the coming days.
With the all-important Parliamentary elections coming up on April 6, the Fidesz political party may now be on the verge of recapturing a two-thirds supermajority in Parliament. Whereas interest rate reductions previously appealed to the public in lowering borrowing costs and showcasing Hungary's dominance in financial markets, the persistently weaker exchange rate is now beginning to weigh on popular sentiment.
The lower-than-expected February consumer price index (at 0.1 percent versus market expectations of 0.4 percent) will provide the MNB with additional fuel to argue for continued easing.
A stronger, more resilient forint might bolster the governing party's image and help to garner more voter support — perhaps even giving Fidesz the necessary push over the supermajority finish line.
In light of these conditions, along with the overarching geopolitical situation, I expect to see a short-term burst of strength in the forint in the next few weeks. It might be short-lived but this may be a quick profitable trade in the short run.
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