A few weeks ago the forint broke through key points. For a short while, it looked as if the breakout might not have been successful. The current strengthening is driven by a technical factor, and the realistic target for the exchange rate to return to the range it was in during the pandemic.
The forint recently broke through key points into strength and then fell back when S&P downgraded Hungarian sovereign debt. But the weakness lasted only two days. After that, the soaring continued as if nothing had happened.
The euro fell to 382 forints, which is a good result in the short term. The last time the euro was here was 9 months ago, and since then it has been weakening continuously. According to Napi.hu, the current strengthening is driven by a technical factor.
The point that the forint crossed was roughly around 390-393, which was a major resistance for a long time. A few weeks ago, however, the forint managed to break through it, although it had been stuck there several times in the past. After the country downgrade, however, there was a renewed strong weakness: for a few days it looked as if the breakout would not be achieved.
Several specific factors contributed to the breakthrough, and their overall impact was stronger than the sales wave triggered by the downgrade, allowing the recovery to start again. In fact, it has continued with great momentum: allowing the strongest point since May last year to be reached.
A key factor was that the chances of receiving EU funds were greatly increased. The government appears to be doing its utmost to make this happen, although previous communications have suggested that the market was not secure. And if large payments in euros were to come in, the conversion would strengthen the supply of euros in the market, while the amount of foreign currency reserves could even increase.
However, the most important factor was the December trade balance. The large deficit of previous months, which had generated significant euro demand, has been eliminated. This is presumably mainly due to the fall in gas prices. This may permanently remove the trigger that caused the forint to collapse last year.
The passing of the devaluation threat is encouraging many investors to prefer the very high yields available in forint compared to the returns available in euro. This also increases demand for the forint. Barnabás Virág, Vice President of the Hungarian National Bank (MNB) expects inflation to peak, followed by a steady, if not rapid, decline this year.
“A cut in the central bank’s base interest rate is not expected for quite a long time,”
he told to Napi.hu.
It is worth looking at how much weakening has taken place over the longer term, and how much of this has been due to factors that no longer exist. The weakening trend started in 2018, however, it was rather slow at first. When the COVID-19 pandemic broke out in March 2020 in Hungary, there was a significant weakening followed by two years in the 345-370 range.
After the pandemic, we may have thought that everything would be back to normal. However, in the second half of 2021, the gas price rise started and followed by the Russian-Ukrainian war. Although the war continues, the impact of the factors has been greatly reduced. Therefore, it may be a realistic target for the exchange rate to return to the range it was in during the two years of the epidemic, between 345-370.