Central Europe's most volatile currency, Hungary's forint, firmed on Friday ahead of Sunday's elections which Prime Minister Viktor Orban's Fidesz party looks set to win. It extended gains to a third of a percent and hit two-month highs against the euro after solid US jobs data lifted risk appetite in global markets. But Budapest's benchmark stock index - more sensitive to political uncertainty - fell 1.5 percent.
Traders said that if Fidesz holds onto power, an initial relief rally in Hungarian assets may be followed by renewed concerns about Hungarian policies. They include government plans to help Hungarians strapped with foreign currency mortgages, possibly via measures that could hurt the country's already heavily taxed banks.
Concerns that the central bank could cut interest rates too aggressively could also hurt the forint. Fidesz has a robust lead in all opinion polls. However, a strong showing for the far-right Jobbik party could dampen any positive market reaction, market participants said. "If Jobbik performs better than expected, that could push the next government into more anti-market measures," a fixed income trader said.
Jobbik's campaign has centred on clamping down on crime and corruption, and a plan to convert all foreign currency loans at the original forint exchange rate. It uses strong anti-bank rhetoric. Some market players fear the party in opposition could push Orban's Fidesz into more radical measures to help troubled foreign currency borrowers. The forint was trading at 305.89 against the euro, hovering at the top edge of its range in the past two months, which saw it near 315 several times.
Comments by the European Central Bank (ECB) on Thursday opening the door to possible monetary stimulus measures to help the euro zone's recovery have supported bonds and currencies in Central Europe, a region with strong economic links with the euro zone. Poland's 10-year bond yields were near their lowest levels in five months at 4.17 percent on Friday.
Hungary's corresponding yield of 5.53 percent was the lowest since January. The region's high-yielding bonds may join a debt rally in the euro zone peripheries if the ECB indeed prints money and the crisis in neighbouring Ukraine does not escalate. But junk-rated Hungary's bonds have less room to firm than Poland, traders and analysts said.
"A Fidesz win would be market-positive as it would remove uncertainty, and we would know what we can expect," one bond trader said. "True, that means unorthodox policies, with not definitely market-friendly measures, while some people expect that the relations with banks may become slightly more relaxed." In a Reuters poll this week, analysts projected that the region's economic recovery could help the forint, the zloty and the Czech crown strengthen about 2 percent against the euro in the next 12 months.
However, the domestic news flow could keep Hungarian assets volatile if Orban retains his job, analysts said. "Unusual policies (such as free credit offered by the central bank) to support growth should be expected," Eurasia Group said in a note. "The government's desire to create a non-profit public utility sector will also likely continue, with further state takeovers and the ousting of foreign owners."