Is the forint too tough or will another low await in 2021?

It was a difficult year for the forint

The year 2020 will surely have a prominent chapter in the forint’s history book, as barely three months have passed since the 330 exchange rate at the end of last year, when the Hungarian currency reached a new all-time low of around 370 against the euro. Even after that, the Hungarian currency was unable to permanently strengthen below 345, and in the fall the exchange rate retested the critical level of 370.

Based on the current EUR-HUF exchange rate of around 360, the forint has weakened by almost 9 percent since the beginning of the year.

Compared to regional currencies, the decline in the Hungarian currency is not so prominent, as the global risk aversion experienced in the crisis situation had a similar effect on other emerging assets. The guilder depreciated 3.5 percent against the Polish zloty this year and 5.3 percent against the Czech crown.

What can come after such a year?

After such a year, perhaps we could rightly think that the worst cannot come in 2021, little by little analysts are also updating their forecasts with the forecast for next year. In summary, it now appears that the following factors may move the Hungarian exchange rate for the next 12 months:

• International market sentiment, for example, could continue to be significantly affected by the coronavirus epidemic. At the moment, there is optimism around the world for now, with most expecting the vaccines to arrive at the beginning of the year and then after the vaccines, maybe life can go back to a “normal wheel cut” from mid-2021. Of course, this can even change in a positive or negative direction, which can have a significant impact on the outlook and economic sentiment.
• For many, the question of what to expect after Joe Biden’s inauguration in January remains a question, especially in terms of the evolution of US-China relations.
• From Hungary’s point of view, it will be worth paying attention to the debate on the EU budget that erupted last week, although, if we are lucky, it may end in early 2021. If the solution is prolonged or if the relationship between Hungary and the EU deteriorates even more, it would be clearly negative for the forint.
• The other key issue may be the monetary policy of the MNB. After the drop in inflation seen in recent months and the strengthening of the forint, analysts say that the Hungarian central bank could even relax in December, most likely reducing the one-week deposit rate back to 0.6%, the base rate. And in the medium term in 2021, the main question may be whether the Monetary Council will be willing to take the necessary austerity measures in a timely manner if the economic recovery brings with it mounting inflationary pressures. For example, an analyst at Commerzbank has for months considered one of the main risks that the central bank could delay interest rate hikes next year.

ING Bank experts recently predicted that the recovery of Central and Eastern European currencies could slow down as the economy recovers in 2021, but

the forint may still be the underperformer in the region.

Analysts favor the Czech koruna because they believe the Czech central bank tends to be more tolerant of the strengthening of the currency. The difference between the zloty and the forint may be the balance of payments: although the external position of the Poles is excessive, there is a slight deficit in Hungary’s balance of payments, which can decide in favor of the Polish currency. Overall, regional currencies could also be supported by dollar weakness, according to ING, with banking experts predicting a 1.25 euro-dollar exchange rate by the end of 2021.

An important factor is that ING awaits an agreement on the EU budget, with good chances until the end of the year of the German Presidency. If things drag on, they think Poland is more likely to give up than Hungary, but their basic scenario is that in the end no one will veto the budget.

From a forint point of view, it may be encouraging that it can end the year with a higher real interest rate than its Czech and Polish competitors, even if the MNB cuts the one-week benchmark rate to 0.6% in December. . Analysts say the central bank will not accept this after repeatedly stating that it wants to keep short-term interest rates at a safe distance of zero percent.

Overall, according to the bank’s analysts, the forint may stabilize against the euro at around 355-360 in the coming months and then weaken slightly to around 365 in the second half of 2021.

Experts at Erste Bank see a similar outlook for the Hungarian currency, according to which the exchange rate may remain around 360 in the first half of 2021, and then the forint may slightly strengthen against the euro to 355 in the second. half of next year.

Commerzbank, which expects an exchange rate of 370 euros in the second half of 2021, is a bit more pessimistic about the florin than the previous forecast. However, according to Morgan Stanley, the US bank, the Hungarian currency may strengthen to 350 next year.

In other words, it is too early to make predictions for 2021, but it seems that we can be confident in the stabilization of the exchange rate next year, and there is not much chance of a big change in any direction like this year. The exchange rate around 360 also seems convenient for the MNB, since the new all-time low is not threatened, but the strengthening of the currency will not stop the economic recovery.

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