The Hungarian forint is depreciating at a startling pace: how much further might it weaken?

While we need not anticipate a fuel supply crisis in the near term, the forint could easily tip into crisis itself, dragging down the entire Hungarian economy in its wake.

Oil and gas prices weaken Hungarian forint

This morning, the euro exchange rate edged back into sight of the 400 mark once again. The last time it was this expensive was last summer; since then, the forint has steadily strengthened. At the end of February, for instance, it took 373 forints to buy one euro, with further gains seemingly within reach despite the Hungarian National Bank’s cut in its base rate from 6.5 per cent to 6.25 per cent.

Trump’s attacks on Iran alongside Israel could swiftly render all this parenthetical, however, with the Hungarian national currency’s slide potentially delivering another inflationary shock to the Hungarian economy. According to Telex, the reason is straightforward: Hungary is acutely exposed to energy imports from abroad. As soon as energy prices rise, the Hungarian economy – and the forint – react sharply and immediately. Indeed, gas prices on the Dutch TTF exchange have surged by 40 per cent in a single week. Hungary sources the bulk of its gas from Russia, but Russian prices track those on the Dutch (Rotterdam) gas exchange with a lag of one or two months – which explains the forint’s current plunge. The G7 goes further, noting that the Hungarian national currency moves in sync with gas exchange rates.

Venture capital leaving Hungary?

Naturally, it is not only the euro that is strengthening; the dollar is too, with this morning requiring 345.14 forints per dollar – a level last seen, again, last summer.

In the days before President Trump’s inauguration, it took more than 400 forints to buy a dollar, but since then the dollar – in line with America’s external economic policy – has lost much of its value, dipping below 318 at the end of February. That represents a quarter of its value eroded in a little over a year. Now it appears to be clawing its way back, as investors once more flock to the dollar amid the crisis. This spells bad news for less safe-haven emerging-market currencies. Estimates suggest Hungary harbours some 7-8 billion euros in speculative capital that could flee at the first whiff of bad news.

How far might the forint weaken?

The forint’s depreciation is not a uniquely Hungarian phenomenon. Telex notes that the Polish zloty is weakening similarly, though the Czech koruna and Romanian leu, by contrast, are not.

Péter Virovácz, an analyst at ING, believes there will be no return to a 400-forint euro. He expects the rate to stabilise in the 373-390 range. Even if global market uncertainty drags on, he predicts a settling around 380. Only an unexpected shock from the Middle East war, he adds, could upend that forecast.

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