On Wednesday morning the forint started to strengthen sharply. The level of 375 against the euro was no obstacle for the Hungarian currency. The last time the forint was this strong against the euro was in April last year. What are the reasons for its strengthening?
The forint has been performing extremely well all week. However, on Wednesday morning, it saw particularly strong buying power, napi.hu reports. The exchange rate quickly moved from 378 to 374.40 then to 373.96 against the euro. The phenomenon is welcome and not surprising, the news portal write, as it has become evident that the Hungarian currency has been on a strengthening trend in recent months. What could have triggered the process now?
It is difficult to pinpoint the exact cause of a currency movement. This is because the intentions of many participants shape the market. On Tuesday afternoon, the Hungarian central bank (MNB) gave a strong signal that a cut in the base rate and an easing of monetary conditions in general “is out of the question in the near future, as a sustained dismantling of the very high and stubborn inflation is needed at current levels.”
This means that, on the one hand, taking short positions in anticipation of a weakening forint has become extremely expensive. Thus, fewer and fewer people are trying to do so. On the other hand, the strengthening trend, which is likely to be permanent, may discourage shorting anyway. Furthermore, the persistently high interest rate may encourage more and more investors to try to skim off this interest rate, which is not available in other currencies.
These are “carry trades”, where the holders of a low-interest currency switch to the higher-interest currency and earn money in it. Their risk comes from the movement in the exchange rate, but as the upward trend appears to be increasingly stable, they may find this risk much less than before.
The words of the vice-president of the MNB on the development of the country’s balance of payments may also have been food for thought for investors. He detailed that the fall in energy prices is a crucial factor in balancing the balance sheet, and exports from new manufacturing capacity are starting to pick up. This could make the balance sheet not only balanced but even in surplus on a sustained basis. That already strengthens the forint exchange rate due to the euro surplus emerging on the market.
Our 10 year government bond moving in the right direction, although we’re still the highest in greater Europe by a margin (other than Russia and Turkey)…