The cheap euro for holidays is already lost - will the 400 forint exchange rate come back in the fall?
Forint has faltered, but is starting to recover
In recent weeks, the exchange rate of the forint has been appreciably volatile, as we have long since said goodbye to the previous exchange rate of around 370. Indeed, the euro recently traded above 390, threatening to reach the 400 mark again.
The forint is still doing well this year at the current exchange rate of over 380, having strengthened by 3.8% against the euro since the beginning of the year. This puts the euro in the middle of the regional race, with the Polish złoty up 4.7% and the Czech koruna only 1.2% stronger this year.
For a long time, the extremely high Hungarian benchmark interest rate of 18% was the main support for the forint, which was also responsible for the euro exchange rate falling below 370 in June. Since then, however, the forint has seen a major turnaround, it has not been able to fully recover its lost ground, and it is highly questionable whether we will see another euro around 370 anytime soon.
What happened to the forint?
In short, the following factors may be behind the weakness of the forint in recent weeks:
- The National Bank of Hungary (MNB) started to cut the benchmark interest rate in May, easing 100 basis points in each of the last three meetings, and the rate now stands at 15%. This still gives the Hungarian currency a significant interest rate advantage, but it is less attractive than it was a few months ago.
- In the international currency market, the weakening of the dollar slowed, with speculation of a further Fed rate hike pushing the US currency below 1.10 against the dollar. This is traditionally bad news for emerging market currencies.
- Some investors are also worried about the zigzags in Hungarian foreign policy, as the government's relations with the European Commission have deteriorated, as well as with the US government over the visa restrictions.
- While data on the budget show an improvement, there is still a risk that meeting this year's deficit target will be difficult, possibly requiring additional government measures.
- There is still no agreement on the release of EU funds, which has been a risk for the forint for more than a year. In this context, there will be two more worrying credit rating decisions in mid-December for the market to watch.
- Expectations of a US rate hike are also fuelling the rise in bond yields, which is also bad news for the forint.
Can the euro reach 400 again this year?
If we look at the outlook for the forint in the coming months, the above factors will also be worth paying attention to. Current expectations are that the MNB could cut the benchmark interest rate by another 100 basis points to 14% on 29 August, before merging with the base rate of 13% at the end of September. Thereafter, the easing could continue towards the end of the year, depending mainly on the inflation outlook. Current expectations are that the policy rate could fall to around 10% by December.
Of course, given the weakening of the forint, the MNB may decide to slow down or pause interest rate cuts. However, the chances of this happening are slim at the moment, and it would probably take a further marked weakening of the forint, even to the 400 psychological level, for the Monetary Council to even consider a pause.
But at least as much attention should be paid to interest rate expectations in developed markets. The market is now increasingly pricing in the possibility that the Fed could raise rates further and keep them high for longer. The comments after recent meetings suggest as much, with US Federal Reserve Chairman Jerome Powell striking a much more hawkish tone than his ECB colleague Christine Lagarde.
And if it turns out that the Fed is more committed to fighting inflation, this could lead to a strengthening of the dollar and a further deterioration in sentiment for the forint. Alongside the euro-dollar exchange rate, similar reasons will make it worth keeping an eye on US 10-year bond yields, which are above 4% on higher interest rate expectations, putting continued pressure on emerging market assets.From a Hungarian perspective, the development of the negotiations on EU funds could be important, as we mentioned that it could even affect the December rating reviews. From the forint's perspective, a negative move by Fitch or Standard & Poor's would be clearly negative news, which could again focus investors' attention on Hungary's vulnerability.
Depending on the above factors, it is unlikely that the EUR-HUF exchange rate will return to the 370 level seen in the spring, but
the 400 level could be within reach.
This would require continued lack of agreement on EU funding, possible negative rating actions, and the dollar's continued strength, or possibly further appreciation of the US currency against the euro.
On the downside, there may be much less room for a strengthening forint, and those who are now expecting a lower euro exchange rate may want to consider a gradual switch even below 380, as there is little chance of seeing an exchange rate around 370 this year. This would require a sudden and unexpected agreement on EU funds from the government, low global energy prices and a renewed weakening of the dollar. On the international side, the forint could be helped by a sudden improvement in sentiment and a stronger willingness to take risks, but there is little chance of that now, given the problems of the Chinese economy being all over the world press.
Cover photo: Shutterstock
