The Hungarian currency hit a two-year low against the euro at 311 at the end of January, levels that it has since been sticking to amid overall uncertainties on the outlook for emerging markets. In all fairness, while Hungary remains lumped with the EMs, other nations have been far worse affected thus far.

Just as the Turkish central bank announced a drastic interest rate hike to halt the lira’s weakening against the euro, the Ukrainian hryvnia was devalued; other EMs have fared no better. As of last week, Russia had intervened for the 17th time this year to stop the weakening of the ruble, which has shed 5% against the dollar since the start of the year.

The immediate focus in terms of the Hungarian outlook is how the central bank will respond and whether it believes the events warrant a modification of its resolute rate cutting cycle, which has constantly reduced the key indicator to historic lows currently standing at 2.85%.

“The economy’s financing is highly reliant on the sentiment on international capital markets, while the low interest rate makes the forint an easy target for attacks. So, if the current nervousness on the market persists and the forint starts a strong weakening, the pressure will also increase on the central bank to opt for a rate hike,” István Horváth, investment director at fund manager K&H Alapkezelő, said.

Mixed outlooks
The only sure thing is the uncertainty that hovers around emerging economies and the markedly different viewpoints of the market participants and the decision markers is doing nothing to help bring any clarity.

National Bank of Hungary governor György Matolcsy was discussing further cuts to the base rate even as the forint hit the new low against the euro, while senior government officials dismissed the events as hardly important fluctuations that have nothing to do with Hungary’s economy. Caucus leader for the governing Fidesz party Antal Rogán said that the events only show the “usual” forint weakening that happens every year.

“The currency fluctuations show that the uncertainty of the global economy and the European economic crisis haven’t ended yet, which makes European currencies fragile,” Prime Minister Viktor Orbán added, also stressing that there are no endemic reasons.

In contrast, analysts like Saxo Bank’s chief investment officer Steen Jakobsen say that international affairs are only 30% to blame; the remaining 70% is down to Hungary’s own legal and economic issues.

Regardless of the reasons, market participants think that the central bank rhetoric points to the continuation of the rate cutting cycle and even if there is a change along the road, it will take further, considerable currency depreciation before that point is reached.

“We think a warning level based on the last financial stability report could be in the 340-350 region,” Nomura analysts Peter Attard Montalto said in a research note.

Horváth agreed that the MNB will need additional pressure to consider rate hikes, which he thinks would likely come through a sequence of failed government bond auctions.

Stories to follow
On the international stage, the most decisive player will be the U.S. Federal Reserve, where new boss Janet Yellen has promised to continue the ongoing downscale of the stimulus program, or ‘tapering’, as it is known.

Domestically, there are elections to consider that some forecasts show will entail the need for corrections, since the country’s deficit will likely grow beyond the 3% of gross domestic product threshold demanded by the European Union.

Additionally, the Luxembourg-based European Court of Justice as well as Hungary’s Constitutional Court will reach a verdict about foreign currency loans soon. A ruling that could serve the basis for declaring forex policies null and void will certainly bring more pain for the banking industry and consequently further shake investor confidence about the viability of the Hungarian economy.