Russia’s invasion of Ukraine sent markets in the region into a whirlwind and pushed the Hungarian forint to a record low against the euro this week. The National Bank of Hungary said it would take the necessary measures to contain the impact of the Ukrainian conflict on financial markets.
International market sentiment sank this week as Russian troops descended on Ukraine and the European Union, together with the United States, announced a set of sanctions against Russia. Investors’ flight to safety, a common occurrence at times of heightened uncertainty, took a heavy toll on emerging market assets in the region.
Forint in freefall
Hot on the heels of the Russian invasion, Hungary’s currency plunged to a record low against the euro on three consecutive days this week, slipping past 383 to the euro by Wednesday afternoon. The USD/HUF rate also peaked at a record 340, up 8.1% since the crisis.
The forint is by no means the only currency to suffer. The US dollar is the only currency against which virtually every other currency, including the Euro, has fallen. Analyst suggest that the US Federal Reserve may need to take action in stabilizing global markets.
Central banks in action
The Hungarian National Bank will use all tools at its disposal to intervene to ensure the stability of domestic financial markets, the central bank told state news agency MTI on March 1, after Hungary’s currency and the stock market went into a free fall. Policy makers in Budapest said they were ready to intervene "at any moment" while Poland's central bank announced that it had sold a certain amount of foreign currencies for zlotys in response to the excessive moves in the exchange rate.
Central European central banks were among the first in the EU to raise interest rates over the past year in the face of steadily rising consumer prices. The Russian invasion and the Western sanctions are expected to drive inflation even higher, triggering further interest rate increases. Czech Central Bank Governor Jiri Rusnok warned last week that the conflict would have a pro-inflationary effect.
Currency traders sounded pessimistic notes in Budapest this week as panic selling engulfed the forint. One trader noted that even a rate hike would be insufficient to put a floor under the currency, as market sentiment was overwhelmingly unfavorable for assets deemed risky by investors.
The actions of the Polish central bank and the verbal intervention of policy makers in Budapest looked to have had little effect in halting the currencies' slide. Analysts noted that the Polish central bank might return to the markets to buy zloty and tamper the depreciation of the currency.
The fundamentals of the Hungarian economy are strong, as evidenced by data of the period following the first wave of the coronavirus pandemic, the National Bank of Hungary said. "The clear goal of the MNB is to ensure that the increased risks due to the geopolitical circumstances will not jeopardize Hungary's price and financial stability. Money market movements are not justified by fundamentals, but they increase upside inflation risks," the bank added.
Stock market jitters
Hungarian stocks also suffered in the immediate aftermath of the Russian invasion, with prices recording their largest intraday declines since the 2008 economic crisis. The sell-off pushed the benchmark BUX index below its 20, 50 and 200-day moving averages.
Although stocks regained some of their losses by midweek, investors punished OTP – Hungary’s largest lender – especially severely. OTP is present in a dozen countries in the region and has subsidiaries in Russia and Ukraine. The bank's shares have lost about the third of their value over the past week.
OTP Bank has an excellent capital position and the lender can withstand further possible market shocks in Russia and Ukraine, the Hungarian central bank told Reuters. "Based on the stress tests and calculations, the group-level capital adequacy of the bank is excellent, which would not change substantially even in case of a further significant market shock in Russia and Ukraine," according to the central bank.
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