Remarkable achievement: Hungarian forint becomes one of the best in the world

The Hungarian forint has experienced a remarkable turnaround this year, following its historic low in the previous year. Since the beginning of 2023, the currency has appreciated by nearly 7 percent against the euro and 8.3 percent against the dollar.

Although the Hungarian National Bank (MNB) started reducing the policy rate in May, it did not weaken the forint significantly. This was due to the continued high interest rates in Hungary, writes Portfolio.

Behind the scenes

Reports from the market indicate that the benchmark interest rate increase to 18 percent has made the forint one of the most sought-after investments. Not only in the region, but globally as well. The high interest rate level presents favourable conditions for carry trades, enabling investors to benefit from significant interest rate differentials even without significant exchange rate fluctuations.

The substantial strengthening of the forint cannot be solely attributed to the high interest rates. Other contributing factors include positive international sentiment, the depreciation of the dollar and the decline in global natural gas prices over the past six months. Improved investor sentiment towards emerging markets and the favourable external position of the Hungarian economy, which heavily relies on energy imports, have also played significant roles.

Hungarian forint on the roll

Since last October, the forint has emerged as one of the world’s preferred investments. The currency has witnessed a nearly 20 percent increase against the euro from its lowest point. The performance of the forint this year further confirms its exceptional performance, surpassing most other currencies.

Over a six-month period, the forint strengthened by 8.3 percent against the dollar. It was second only to the Mexican peso, which experienced a gain of over 12 percent. The Brazilian real ranks third, followed by the Polish Zloty, which is one of the main competitors of the forint.

Although the forint’s performance over the last three months is not as outstanding, it still ranks seventh among mid-range currencies. This may be attributed to the fact that the euro-for-euro exchange rate reached a significant support level at 370. Furthermore, the MNB had already hinted at upcoming interest rate cuts in the previous month, with the first cut occurring in May.

What’s next?

Recent weeks have indicated that the Fforint’s strengthening may have reached a plateau. The currency may stabilise at around the 370 level and trade within a narrow range. According to analyst expectations, the MNB could set the base rate at 13 percent in September. This would still be almost double that of regional peers.

Nevertheless, risks remain for the forint, particularly concerning the fate of EU funds, which could present challenges in the second half of the year. If no agreement is reached, investors may refocus on this issue. This could potentially lead to the end of the forint’s upward trajectory, alongside further interest rate reductions.

Source: Portfolio