Late September saw the forint diving to a historical low against the euro and a near-record low to the U.S. dollar. While this can mostly be blamed on external causes, such as a possible no-deal Brexit and recession fears in Germany, analysts say that maintaining the current dovish monetary policy will not help drive the currency back to its earlier levels.
The Hungarian currency has been on a weak pathway over the past few weeks and reached an all-time low against the major currencies. It rose above HUF 331 to the euro and above HUF 300 against the U.S. dollar. The latter is threatening an 18-year record, but back then the dollar was performing very poorly compared to the euro, which affected the HUF/USD exchange rate; this time, the reasons in the background are numerous. However, the macro data from the Hungarian economy does not justify such a bad forint performance.
The last time the EUR/HUF exchange rate went above 330 was at the beginning of July last year: on July 2, 2018, the euro rose to HUF 330.77. As for the American currency, one dollar was worth more than HUF 302 on the first trading day of September. The last time we saw the exchange rate near to this point was in 2016, with a 302.5 quotation. If the forint now passes this mark, it means that it will reach an 18-year-low: in 2000, the USD/HUF exchange rate stood at 319.4.
According to economic news portal portfolio.hu, there are several reasons for the record low forint. The U.S.-China Trade War, the recession in Germany and growing fears of a no-deal Brexit are among these factors. At the same time, the Hungarian assets have one of the highest negative real interest rates amongst emerging markets. Last but not least, the National Bank of Hungary (MNB) is not likely to raise interest rates in the near future, due to the currently tolerable inflation level, which also weakens the HUF exchange rate.
The MNB has kept the rates unchanged since May 2016, when it cut the main rate 15 basis points to 0.9%. While the forint is exposed to global trends and the effects of a loose domestic monetary policy, Hungary’s strong economic performance and tight fiscal policy have ensured government bonds remain attractive enough to keep yields near all-time lows.
Portfolio.hu made a technical analysis based on the exchange rate chart of the past eight years, and came to the conclusion that, based on this, the weakening of the forint may be over at 332, and the dollar exchange rate corridor will be between 302-330. In spite of the recent developments, the MNB is not likely to intervene, analysts say.
“In a floating exchange rate system, it is not unusual to see such weakening from time to time. What makes it more problematic this time is the fact that the weakening period started from an already low exchange rate level,” Gábor Regős, head of macroeconomics at Századvég said.
He emphasized that the trade war, the political uncertainties in Italy, and the German recession all contributed to the weak performance of the Hungarian currency; however, the latest announcement from the MNB also added to the negative developments. That statement from the central bank suggests that no further tightening can be expected in monetary policy. And if the monetary conditions remains loose, it will not make the forint more attractive to foreign investors.
But where might the fall of the forint come to an end? According to ING Bank head economist Péter Virovácz, it depends on how the external situation worsens.
“The MNB’s statement, which confirmed that the central bank does not have an exchange rate target, basically gave a green light to the fall of the forint. After this, it is hard to imagine any intervention by the MNB,” Virovácz said.
The trade war is not likely to end any time soon, and a no-deal Brexit is closer than ever, which means that the forint could further depreciate in the coming weeks and reach the 335 mark, Virovácz told portfolio.hu.
He believes that the fall of the forint will come to an end if the picture becomes clearer about Brexit, if the U.S.-China trade war eases, the European Central Bank and the Federal Reserve start an economic stimulus, and if the German government launches fiscal loosening.
“For all this, we have to wait at least a month, but in case of the trade war six months or a year,” he said, adding that the new trading corridor for the forint can be at 330-340 in the future.
The Central Statistical Office will publish numbers on the July performance of the Hungarian industry on September 6. This will be followed by data for the August consumer prices two days later. A second estimate of July industrial performance will be released on September 12. Only a day later, the KSH will shed light on how the construction sector performed in July.