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Market Analysis

Fundamental Analysis: Volatility for HUF ahead of EU Elections

May 24, 2019
BY Michael Stark

The forint has been more volatile than usual in most of its pairs since yesterday. EU elections and the Magyar Nemzeti Bank’s Financial Stability Report have contributed to this. Losses for the forint earlier this week came amid overall weaker outlooks for growth abroad and, to a limited extent, rate differentials.

Dollar-forint made a sudden big gain yesterday to highs above 294.70 Ft. This was the highest figure for this symbol since November 2016. However, price has now retraced from there to 290.44 Ft. EURHUF and GBPHUF’s movements have been broadly similar, with prices now at 325.30 Ft and 367.85 Ft respectively.

Election instability and growth worries

Growing popularism in the EU and particularly Hungary has somewhat overshadowed this week’s elections. Based on recent polling, Hungary’s governing Fidesz party is set to increase its share of seats in the European Parliament. These expectations have caused volatility for the forint because of ongoing tension between Hungary’s government and the European Commission.

The lowering of forecasts for growth in the rest of the EU has also been negative for the forint over the past few months. More than 50% of Hungary’s exports are machinery and other high order goods which typically do less well when economic growth is slower. Demand is generally lower among Hungary’s main trade partners in the EU and Russia. This appears to have contributed to weaker figures for trade balance this month.

Hungarian monetary policy is only really a significant factor against the dollar. Yesterday’s Financial Stability Report from Hungary was mixed. However, it did not by any means suggest a more dovish tone. Looking at rates themselves, the current differential for USDHUF remains 1.35-1.6% against the forint. The Fed was hawkish in this week’s minutes, at least compared with most other central banks. Nevertheless, the likelihood of the differential widening before the end of the year still seems to be fairly low.

Analysts increasingly expect a rate hike

The Magyar Nemzeti Bank (MNB)’s base rate of 0.9% is one of the lowest in central and eastern Europe. It remains at this historic low level despite the ongoing uptrend in inflation since 2016. Non-core annual inflation for April at 3.9% is in fact the highest figure in more than six years. It also stands against the MNB’s target of 3%.

Ever-higher inflation means that the MNB’s next meeting might be crucial for the forint. The central bank’s monetary policy committee will decide on rates at noon GMT on Tuesday. Although there’s no majority expectation for a hike next week, traders will be paying close attention to the meeting. Any hints of tightening in June could support HUF.

Beyond rates, results of the EU election are more likely to drive volatility than a clear direction for HUF. However, traders should not rule out the possibility of a conclusion to the ‘Fidesz crisis’ in the European People’s Party.

Data might be more important, though. Next week features two major releases:

  • Wednesday, May 29, 07.00 GMT: Unemployment rate, April (forecast 3.7%; previous 3.6%)
  • Friday, May 31, 07.00 GMT: Annual GDP growth (final), Q1 (forecast 5.3%; previous 5.1%)

If the consensus is accurate for these, the forint might post some gains in many of its pairs.

Forint set for small loss ahead of MNB

HUF’s volatility is likely to remain high until the rate decision next week, but more weakness might be favorable. That said, traders should be cautious of instability around the elections. They should also watch for conditions of saturation from their indicators.

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