Forint Set to Breach All Time Record Against Euro

The Hungarian currency has been on a weakening path for the past weeks and is trading dangerously close to its weakest ever against the euro, seen in April this year. In addition to unfavorable international sentiment, local supporting factors have also vanished and analysts argue that the forint may set new negative records in the short term.

The Hungarian forint is gradually drifting toward the historical low seen in the spring. Given the unsupportive domestic and international backdrop, there is a slim chance the currency will get back on its feet any time soon. Analysts warn that the EUR/HUF 370 level has moved into sight again and the technical picture is worrying.

Shorting the forint
This week, the forint’s exchange rate against the euro inched above 365, a level last seen on April 1, when it nearly hit 370. The exchange rate movements of recent weeks - the Hungarian currency weakened by more than 3.5% against the euro in one month - pointed in the direction of an increase in short positions against the forint. A short position means that investors are betting the price of an asset, in this case the forint, will decrease in value. If the price drops, investors can buy the assets at the lower price and make a profit. The weakening of the forint was steeper than that of other regional currencies, as the Polish zloty lost 1.8% of its value and the Czech koruna dropped 3.2%. All this suggests that market players have turned on the Hungarian currency. Recently released central bank data also underpin this development, as the figures show the stock of current short positions rising to HUF 2,869 billion from HUF 2,562 billion a month earlier.

Why the weakening?
László Szabó, one of the owners of Hold Fund Management, argues that the recipe for a strong currency requires a few basic ingredients. "For a good (strong) currency, take a small interest rate (even better if not so small), a positive balance of payments, a strong economic ally (that you can rely on in difficult times, such as the ECB,) or some combination of the above; naturally, a supportive international investor sentiment is the icing on the cake," Szabó writes on at Alapblog.hu website.
Unfortunately, all the listed ingredients are missing or in short supply. Not so long ago, all the factors needed for a stable forint were available: Hungary had significantly higher interest rates than the Eurozone, an ample current account surplus and a steady inflow of EU development funds. As time passed, these advantages vanished: first, the high interest rate, followed by the current account surplus. In addition, the political differences between Brussels and Budapest may have a negative impact on the inflow of development and crisis relief funds from the EU. To make matters even worse, measures introduced to stave off the economic fallout from the coronavirus crisis have led to a widening of the country’s budget deficit, which may reach 8% of GDP this year. In today’s world burning with Covid fever, it takes less than the above for a country to be billed "risky" by the market, according to Szabó.
More recent developments have also been working against the forint. The rate of inflation jumped unexpectedly in July and the headline figure rose further to 3.9% in August, virtually reaching the top of the central bank's target band (3 plus or minus one percent). This would have warranted some sort of monetary tightening, however the central bank decided to leave monetary conditions unchanged.

Central bank message
After Tuesday's interest rate decision, the Monetary Council emphasized that inflation remains their main concern, and if the inflation outlook changes permanently and significantly, policy makers are ready to use all the tools at their disposal. This message apparently fell short of calming investors as the forint continued to weaken the day after the central bank decided to keep the interest rate unchanged.
“The central bank failed to reassure investors about the fate of the forint, thus the forint is set to remain under pressure. Other regional currencies also weakened against the euro, suggesting that there is a general pressure on the region. Under these circumstances, it is conceivable that the EUR/HUF exchange rate will soon test the 370 level again,” according to analysts at Erste Bank Zrt.
Looking ahead, a number of domestic and international factors will prove decisive for the forint in the short run. Hungary’s September inflation data, to be published in early October, and the GDP figures for the third quarter (due in mid-November) will shape the near-term future of the Hungarian currency. On the international front, a continued strengthening of the US dollar would be bad news for the forint. In this respect, the outcome of the presidential elections in the US, scheduled for November, will be crucial for the dollar and consequently for the forint.