Weekly Strategy-Selling EUR/HUF on EUR Woes, Hungary Relenting to Secure IMF Aid

EUR/HUF has soared in recent weeks as the Hungarian government adopted legal changes that limited the central bank’s independence, among others features, which raised objections from the EU and IMF and threatened to derail an EU/IMF aid package. But this past weekend, Hungarian Prime Minister Orban indicated that there were no preconditions to the negotiations and indicated a willingness to revise or withdraw the objectionable legislation. Hungary desperately needs the EU/IMF aid package or it’ll be forced into default within a matter of months, so we think the government will be forced to retract the offending laws and open the door to a re-start of aid talks. We think this could happen in a matter of days and would very quickly lead to a sharp rebound in HUF as the prospects for a bailout improved.

On the EUR side, we only expect the EUR to weaken further on the back of deteriorating growth prospects and the ongoing debt saga. We would note the potential for weak demand at upcoming Italian and Spanish government debt auctions on Thursday Jan. 12 and also potential for a ¼% ECB rate cut on the same day. However, this strategy is currently counter-trend and subject to volatility from headline news, and so is considered higher risk.

The strategy will be to sell 50% of a EUR/HUF short position at 316.50 (last approx. 315.80) and the second 50% at 319.50 for an average short rate of 318.00. A daily close below the 314.83 daily Tenkan line may suggest entering a short at the market. The stop will be on a daily close above 320.50 (just above the prior highest daily close), or if 321.50 ever trades, for a risk of around 250-350 pips or about 1%. The take profit strategy anticipates a substantial recovery in HUF, so our t/p targets are more aggressive at 303.00 (above daily cloud bottom) and 299.00 recent intra-day lows, for a potential pick-up of 1700 pips or just over 5%. We would trail stops lower beginning on a daily close below the Tenkan line.

EUR/HUF

Support
314.84 Daily Tenkan line
311.54 Daily Kijun line
308.23 Top of the daily Ichimoku cloud (21-day sma at 308.74)

Resistance
317.50 Prior daily highs
320.30 Highest daily close
324.17 Highest daily high
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