There will be a Hungary story in the papers tomorrow. If you read ZH you know that already. I hope no one was long the Forint.

I don’t know what to make of this story. On one side you could say it looks bleak. It appears that the IMF is playing hardball. This from Christof Rosenberg who runs the IMF mission for Hungary:

“Our talks with the Hungarian government have been interrupted as we have not been able to find enough common ground and there remain too many unresolved issues to take this review to our board”.

"Interrupted" is about as strong a language as the IMF uses. Normal language might be; "Take it or leave it." Bad news there. The other side of this is, “what are the fighting about?” It would appear to be nothing, and therefore resolvable.

Hungary’s government tried to persuade the fund to accept a deficit target of as much as 3.8 percent of GDP for 2011 instead of 2.8 percent. (Bloomberg)

So the flap is about whether Hungary can be at 3% or 4% deficit. That’s interesting. The US is around 10%. Most of Europe is currently double the IMF target as well. If the US were to impose measures that limited our deficits to 2.8% we would implode in less than one year. There would appear to be a fairness issue inside of this. After all, the US has the largest vote at the Fund. And it is also the biggest deficit spender.


The dollar closed Friday at some very interesting levels. I called the long DLREUR trade a “rat trap” six big figures ago. But I am quick to admit I did not see this big a move in the cards. My comments on those closing numbers:


YENDLR at 86.55. This is a toilet bowl price. This is screaming short dollar. It is a terrible trade. It does not matter. This looks lower to me.

DLRCHF at 1.0514. Look at this thing on the charts. Now put the macro story on top. This could easily go to par. It has not held that level before. This time could be different.

DLREUR at 1.2908. What can I say? On paper you could argue 1.10. But the market says no. And the market is still long dollars. To get this market net short of dollars would be another 10 big figures up.

So that gets us back to Hungary and the next day or so. Six weeks ago a bad Hungary story (this is a bad Hungary story) would have resulted in a big pop in the DLREUR. The CDS spreads would have all widened and the MSM would be talking about the demise of the EU.

With that in mind it would not be at all unreasonable to expect a pretty good-sized reversal off of Friday’s numbers tomorrow. Given the complexity of Europe’s problems the Hungary story may refocus the market’s attention and the Euro could move back to the low 1.20’s over the course of a few weeks. If you were a dollar bull those closing prices had to look pretty good to get long. And now there are headlines to support it.

It could also go the other way. Surprise, surprise we may find that there are still plenty of dollars on offer and the bad new on Hungary does not stick. That would be a very significant change in how markets react to news. Call that sentiment. How this can change so quickly is always a surprise to me.

We are at one of those inflection points that is worth noting. Either the dollar will start to reverse back to a stronger trend (this is a pretty good test for that) or it is going a hell of a lot lower than we might have thought possible.

Like I said, the weak dollar is not the logical outcome. Therefore the probability of it happening is high.