Hungary's forint can slump to historic low vs. EUR this year

There is no real internal driving force that would strengthen the forint now or the following months, leading Hungarian economists claim.


As the international environment is also highly uncertain the Hungarian currency can possibly weaken to a historic low against the euro this year, maybe even in a matter of weeks, dealers told Hungarian business website Portfolio.hu last Friday (Jan 9). What makes the HUF's weakening, which began earlier last week, special is that there have been no marked change in global investor sentiment.
The forint's swift weakening may be attributed to several factors, the most important of which are the following.
Extremely weak industrial production and export data were published on Thursday and Friday (Jan 8-9.), respectively in Hungary (just like elsewhere in the region), which underpinned expectations for a grave economic recession this year.
In the ongoing Russian-Ukrainian gas dispute that led to the choking of natural gas flows to Europe Hungary is one of the most vulnerable states, according to more than one aspect. This further deteriorates the economic outlook.
Technical factors, e.g. the activation of stop-loss levels in EUR/HUF amidst HUF weakening, major position reshuffling in PLN/HUF, etc., also played a major role in the forint's easing.
Following Monday's non-rate setting meeting, Central Bank (MNB) governor András Simor said the central bank could meet its inflation targets even with much weaker (than 266) EUR/HUF levels. In practice this means the exchange rate would not thwart further rate cuts.
Inflation expectations dropped sharply, which would allow further monetary easing.
Emerging market investors became more cautious due to the Gaza conflict and other currencies in the region have depreciated due to the gas crisis and prospects of weak economic performance and further rate cuts. (Except for the PLN that reached its weakest level to the euro at the end of last year.)
Since Lehman Brothers went down last year, the PLN suffered the biggest losses against the euro (-21%). The next is the HUF (-17%), Romania's leu (-15%) and the CZK (-11%). The leu slumped to a new 5-yr low today and there was even speculation on the market that Romania will turn to the International Monetary Fund (IMF) for help.

The BpSun Staff

15.01.2009