Despite all, the Hungarian forint is still going strong: how?

The government did not inspire confidence with its intervention in the bond market. The fate of EU funds is very uncertain. Despite these factors, the forint is shaking off these concerns, whereas in the past, they would have weakened the currency.

There have been several events recently, which were supposed to make investors lose confidence in the strength of the Hungarian currency. Nevertheless, the forint is going as strong as ever. According to experts, there are good reasons for this, Forbes writes.

The negatives

1. The Hungarian government abruptly intervened in the savings market, with people being more and more pushed to purchase government bonds. Such steps, especially when taken without prior communication and consultation, do not strengthen investor confidence.
2. We are not making much progress in accessing the EU funds. Márton Nagy, Minister for Economic Development, recently spoke about the need to prepare for a scenario without EU funds. At the same time, Finance Minister Mihály Varga stated that the government has no backup plan in the 2024 budget in case the EU funds don’t come through.
3. The budget, filled with optimistic figures, is showing cracks, as it includes several tax increases. Market participants are increasingly monitoring whether the deficit will spiral out of control.
4. Meanwhile, the Hungarian National Bank (Magyar Nemzeti Bank, MNB) has begun its interest rate-cutting cycle. However, this process hasn’t been well-prepared and accompanied by consistent and tight communication.

Forint still going strong

Despite the aforementioned factors, which had always weakened the currency thus far, the forint unexpectedly strengthened to a one-year high against the euro on 9 June, with an exchange rate of HUF 367.69 per euro. The exchange rate has remained below the 370 level since then.

Sándor Jobbágy, the leading macroeconomic analyst at Concorde, said that they did not anticipate any significant impact on the exchange rate due to the MNB’s interest rate-cutting cycle.

“The MNB closely monitors market expectations and emphasises this in its commentaries. It cuts interest rates in line with the already priced-in level of rate cuts, accompanied by strict comments. Therefore, we expect that they will not surprise the foreign exchange market with larger-than-expected rate cuts,”

he said in an interview.

However, an important factor behind the strength of the forint is a trend that we talk about less often with the arrival of good weather and warmth. According to him, the development of European energy prices in recent months and the improvement in Hungary’s balance of payments have had a positive impact on the forint.

What does the future hold?

Jobbágy and his team do not anticipate any significant further strengthening of the forint compared to the current EUR/HUF levels, partly due to these factors.

“However, there doesn’t necessarily have to be a rapid weakening in the near term. For example, if the reference interest rate is reduced to the level of the base rate by autumn, the forint would still have a significant interest rate advantage over the euro and even the major regional currencies. By then, inflation, with a faster decline compared to the region, could reach around 10 percent by the end of autumn,”

he explained.

Source: Forbes