Following hesitant trading – mostly above 270 against the euro in the last two months – the forint strengthened sharply at the beginning of March. Although uncertainties surrounding the outlook for Greek government debt made the forint more vulnerable in recent weeks, the forint was still hit to a much lesser extent than in similar situations earlier, thanks to Hungary’s improving external and financial stability.
In addition, despite elections looming, which could theoretically create uncertain market sentiment, Hungarian markets strengthened notably. Furthermore, the forint was seemingly unaffected by the warnings of the main opposition party (the likely winner of this year’s elections) that the budget deficit in 2010 could reach even 7-7.5% of GDP.
Behind the reasons for a marked appreciation of the forint - as usual - we should consider more than one factor. First of all, as the solution to the Greek debt and deficit problem seems to be taking shape, risk premiums fell considerably as reflected by tightening CDS spreads and bond market yields. But appetite for CEE currencies and assets increased more remarkably following better than expected PMI figures throughout the region, suggesting accelerating growth in these countries.

Exports look up

Further increasing optimism among manufacturers lifted the Purchasing Manager Indices in February from 53.8 pts to 55.9 in Hungary, from 53.1 to 54.3 in the Czech Republic and from 51 to 52.1 in Poland. And all of these PMIs were driven higher by soaring output, new orders, export orders and purchased stocks - strengthening the outlook for an export-driven recovery. This is further supported by increasing domestic demand in Poland, but limited by weak domestic demand in the Czech Republic, and a still falling one in Hungary. The employment component of PMI figures also reflected increasing labour demand at manufacturers.
Sharply improving PMI figures, however, reflect not only better growth outlook in CEE countries but also more competitiveness compared to the EMU countries (namely Greece, Portugal, Spain and even Italy) that have been hit by fears concerning their government debt and deficit outlook recently. Behind the sobering debt outlook of these countries one should consider a less successful catching up process (especially with regard to real convergence) in the last decade and a possible overvaluation of the euro from the viewpoint of their competitive position.
In contrast, with a more deeply embedded labour pool and a manufacturing sector that is more similar in structure to that of core Western European economies, CEE countries are more competitive and thus less vulnerable to an unfavourable debt outlook, despite an ongoing increase of government debt within the CEE countries themselves.
We assume that investors have began differentiating between CEE and Mediterranean EMU countries and this was the most significant factor to support the outstanding currency and asset rally in the CEE region. 

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