Zoltán Varga

2019 had not been a vintage one for the Hungarian currency either, with it weakening quite considerably over the year. Among the main reasons were the monetary policy pursued by the central bank as well as carry trade deals (a popular trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return).  

There have been examples of what are presumably Hungarian institutional investors using the forint to finance such deals, says Zoltán Varga, a senior analyst at Equilor Befektetési Zrt., and that may also have contributed to the weakening of the forint last year.   

Economic fundamentals alone would not justify the weakening of the forint but low interest rates and non-conventional monetary policy tools are a factor.  

“At the beginning of this year, we forecast an exchange rate reaching and even exceeding HUF 340/EUR,” says Varga. “This took place earlier than expected.”

Now, a new market situation has emerged as a result of the coronavirus and the response of central banks to it could significantly affect currency movements, Varga says.  

The National Bank of Hungary, by reducing liquidity through the reduction of currency swaps started a consolidation process in mid-January. As a result, central bank overnight rates have increased.  

Contradictory Goals

The MNB doesn’t want the forint to continue to weaken suddenly and significantly, and it doesn’t want interest rates to increase either; these are two somewhat contradictory goals it has to balance.

Last week’s emergency interest rate cut by the Federal Reserve has given the MNB some time as with the drop between interest rates, the need for an intervention has been eliminated (at least temporarily). The Bank of England followed suit on March 11, and some loosening is also expected from the European Central Bank (on March 12, after this issue went to print), or it might even increase the budget of its asset purchase program, adding more liquidity on the markets.  

All these moves would favor the currencies of emerging markets, meaning the forint would likely strengthen without the MNB’s intervention. The unwinding of leveraged positions in the carry trade deals, due to panic on the markets last week could also help strengthen the forint, Varga adds.  

Varga expects the MNB to favor a weaker forint (rather than higher interest rates). “The aim of the MNB, though, is that the weakening is done at a moderate, calculable pace that may boost the economy,” Varga says. A verbal intervention in February by MNB deputy governor Márton Nagy was sufficient to curb depreciation but that may prove little. Should market conditions fail to improve, further intervention could be needed, the expert notes.  

Inflation will likely moderate at a 3-3.4% rate, Equilor expects. The coronavirus will have a negative effect on the economy, but will have a double-edged sword effect on the inflation rate: fuel prices may drop, but food prices will likely increase. By H2, its rate could decrease significantly due to oil price drop.  

“We forecast a HUF 6-8 annual rate of depreciation last year, which we still believe is relevant,” Dávid Németh, senior analyst of K&H told the Budapest Business Journal. The rates at either extreme may differ slightly from the previously forecasted HUF 323/EUR to HUF 328-330/EUR (bottom) and to HUF 345-348/EUR from HUF 343/EUR at the top.  

Despite increasing inflation and growth rates, during the second half of last year and even earlier this year, MNB communicated that it did not want to tighten conditions, increase interest rates, etc., which contributed to the weakening of the forint, Németh explains.  

Emergency Cut

The Fed’s emergency rate cut last week may help curb forint’s rapid depreciation seen since last October and may even stabilize it, Németh says. But it still greatly depends on what action MNB will take, he adds.

“The inflation rate will likely stay high, so I still see a reason for the MNB to increase interest rates to stabilize the forint.” If it doesn’t do so in March, the forint could start to weaken again, he adds. There are some fundamental causes as well, including a negative current account, high inflation and slowing economy.  

How much the forint’s exchange rate will change is also largely dependent on the impact of coronavirus, the expert notes.  

“We cannot tell when it ends, what extent it will affect the tourism industry, the economy in both the European Union and Hungary,” he adds. The monetary policy response also depends on how the MNB assesses the coronavirus’s effect on the economy and the inflation.  

“In the short-term, it may increase prices. Should the epidemic be prolonged, disinflationary effects may be more marked, but we cannot see that at this point,” Németh says.