Will there be another 370 next year for the euro? So why not 400?

2020 was not the year of the forint either

After last year’s annual close of around 330, the forint soon depreciated against the euro in 2020, reaching its weakest level in early April, when

369.59 guilders had to be given for one euro, which has been a record exchange rate ever since.

In autumn, the forint came dangerously close to this, but the price did not reach the psychological limit of 370 even then. If there are no large fluctuations in the trading of illiquids in the last days of the year, we can close the year around 365, which would mean a weakening of around 10% against the euro compared to the end of 2019.

As a result, the forint underperformed in the region, as the Polish zloty depreciated 7.65% and the Czech koruna 3.1% since the beginning of the year. There were several reasons for this poor performance:

• In terms of fundamentals, the forint is perhaps considered the riskiest in the region today. Although there are no serious problems with the Hungarian economy and financing, our balance of payments has gradually deteriorated in recent years and the budget deficit is also increasing due to the crisis. In the spring, there were analyst views that, with the withdrawal of currency swaps, the MNB’s foreign exchange reserves would be sufficient based on international indicators.
• In recent years, the MNB’s monetary policy has been characterized by unorthodox solutions, which have often also raised doubts in the market.
• There were also some unique stories that put pressure on the forint exchange rate from time to time, such as the veto threat related to the EU budget at the end of the year.

The graph below shows that in the spring, with the onset of the pandemic, the forint weakened in parallel with the main regional competitors due to the general aversion to market risk, mainly in the second half of the summer and at the end of the year. . This was mainly due to inflation rising to around 4% in the summer and then to the aforementioned EU debate in December.

What can you expect from the forint from here in 2021?

By the end of the year, the forint was once again dangerously close to its spring low of 370, hovering around 365 on December 31, so

The real question is not whether there is a possibility of a new all-time high in 2021.

It is enough if there is a slight deterioration in the markets at the beginning of the year, and we can already worry about the forint. If we look at the outlook for the Hungarian currency a little further, it does not seem that we will see a similar weakening next year as next, most analysts expect stagnation and minimal strengthening. On the one hand, with the gradual introduction and diffusion of vaccines, restrictive measures will slowly be lifted and the economy may begin to recover. However, this can be strong from the second trimester at the earliest, or from the second half of the year, when it is possible to produce enough vaccine to start mass vaccination in society. Until then, there may still be tough times, and some experts are also considering the outbreak of a third wave of the conceivable epidemic earlier this year.

During this period, the monetary policy of the MNB can be key and analysts can imagine practically any type of product:

• The central bank also maintained its lax communication at the end of the year, with the economy expected to take a long time to recover in early 2021 through a week’s deposit. This would mean that the MNB could cut the key one-week interest rate, which rose 15 basis points in September, to 0.6% of the base rate.
• However, according to other opinions, if the forint approaches its all-time low again, austerity cannot be ruled out. Experts at the French Societé Generale believe that the one-week deposit rate could rise as much as 1% in the first half of the year, but at the same time the base rate could drop 10 basis points to 0.5%.

Everyone agrees that the central bank will step in with the one-week instrument in any direction if it wishes. According to analysts, the guilder exchange rate of around 350-360 suits them, and if the price goes out of here permanently, the MNB could consider a step.

According to Commerzbank analysts, the forint will not come under strong pressure for the first time in the coming months, and the price of the euro could remain around 360. In the second half of 2021, however, inflation is precisely what that will rebound with the economic recovery which can cause problems, as real interest rates may return to the focus of investors. In other words, if the rate of price increase rises again to around 4%, the Hungarian real interest rate may again become strongly negative under current interest rate conditions. According to analysts at the German bank, this may again raise the question of whether the MNB is willing to tighten monetary conditions in due time.

In 2021, the market is expected to test the resistance of the MNB, and the weakening of the forint may cause further inflationary pressures.

says Tatha Ghose, an analyst at the bank.

Therefore, the expert also does not expect a significant weakening of the forint, according to him, by the end of 2021, the euro-forint exchange rate may be around 370. Then, in 2022, the moderate weakening of the Hungarian currency market may continue, according to which the price of the euro could be 380 in two years.

All in all, if 2021 would bring a weakening of the forint similar to this year, even the exchange rate of 400 euros would not be unattainable by the end of the year. However, the chances of this happening are now relatively small, and most baseline scenarios do not expect a further 10 percent weakening. Of course, there may be risk scenarios that bring significant weakening, which are difficult to predict at the moment, the most serious risk now appears to be rising inflation and international risk taking for next year.

Cover image: Getty Images