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The outlook for the Hungarian economy and the forint will also be discussed at the Budapest Economic Forum conference.
The forint attackers started again
After the exchange rate movements in recent weeks, it was already conceivable that the stock of short positions against the forint would rise again, as the Hungarian currency weakened by more than 3.5% against the euro in a month. Furthermore, the forint underperformed significantly, as its closest rival, the Polish zloty, depreciated by 1.8% and the Czech koruna by 3.2%.
It can also be seen from the above that it is no longer simply the weakening of the forint, in recent weeks a more general weakening of emerging markets has begun, which has already found the Hungarian currency at a weak level. Compared to the beginning of the year, the forint is already weakening by more than 10%, while the zloty depreciated by 5.6% and the crown by 5.8%.
This deterioration in international sentiment is partly reflected in the forint’s market positioning.
According to the latest set of MNB figures, overseas positions against the Hungarian currency have been gaining ground almost continuously over the last month.
With this, the current short-term stock was 2,869 million HUF, compared to 2,562 million HUF in the previous month.
With this, most of the positions against the forint closed in August were reopened by investors, and the value practically returned to the level of July, according to the central bank database.
But what is weakening the forint now?
We mentioned that the line of argument against the forint has expanded in recent weeks and the trend has intensified as international sentiment has deteriorated. So now all of the following factors have pushed the coin close to all-time lows:
- Inflation jumped unexpectedly in July, and then 3.9% in August virtually reached the top of the central bank’s target band (3 plus or minus one percent). On this basis, the “normal” Council should already consider tightening.
- Now, however, there is no “normal case” as the economy fell 13.6% in the second quarter, exceeding expectations. For this reason, in addition to the budget, a greater economic recovery would be justified on the monetary policy side.
- These two internal factors were joined by aversion to international risk and the strengthening of the dollar. The US currency weakened to 1.20 against the euro in early September and then changed from there. And this is traditionally bad news for emerging market currencies, with the forint currently having one of the lowest real interest rates, making it even more vulnerable.
The MNB was expected to resolve the discrepancy on the first two points. Following Tuesday’s interest rate decision, the Monetary Council emphasized that inflation remains their main guide, and if the inflation outlook changes permanently and significantly, they are ready to use all available means.
However, this message does not seem to have been enough for investors, as the forint weakened further on Wednesday.
Recent news related to the above three factors may continue to move the exchange rate in the next period. At home, inflation data for September may appear in the first half of October, followed by GDP statistics for the third quarter in mid-November. Meanwhile, the euro-dollar exchange rate will be worth keeping an eye on if the US currency continues to strengthen, which could also be bad news for the forint. In this sense, the outcome of the US presidential elections in November may also be decisive.
According to analysts at OTP Bank, the base rate will not change until the end of 2021, and inflation may decline next year due to the disinflationary effects of the crisis. The possibility of further easing is almost out of the question and no adjustment is expected. The MNB can further support the economy through the asset purchase program, if necessary, increasing its weekly budget by HUF 40 billion.
Cover image: Getty Images
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