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Market Analysis

Fundamental Analysis: Forint Declines as MNB Holds Base Rate

March 26, 2019
BY Michael Stark

The Hungarian forint has made sudden losses amid high volatility today after the meeting of the Magyar Nemzeti Bank. The MNB kept its base rate unchanged as expected; however, HUF received some support from a hike in the overnight deposit rate.

USDHUF posted a big gain this afternoon, reaching above the important area of 282 Ft again. EURHUF moved up to month highs around 318.50 Ft at the time of writing. The forint also declined against the yen, with HUFJPY resuming its retreat below 39 sen.

Base rate unchanged but signs of tightening

As was almost universally expected by analysts and traders, the Magyar Nemzeti Bank left its base rate unchanged at this afternoon’s meeting. 0.9% is the lowest base rate set by the MNB since its establishment in its modern form in 1990 – it remains until at least April 30.

Conversely, the MNB did decide to increase its overnight deposit rate by 10 basis points. This sees the new deposit rate approach zero again at negative 0.05%. In general, it appears from the meeting that the central bank is starting to ‘normalize’ policy as it has hinted over the past few months.

No big surprise from the MNB then, but pairs with the forint have recently found considerable volatility due to weaker economic data from the eurozone. The forint is usually very sensitive to changes in demand from Hungary’s main trade partners, the EU and Russia. Weaker industrial data from the EU – especially Germany – continues to generate some headwinds for HUF.

Rates are also causing a degree of upward pressure on USDHUF. Although the MNB appears to be on the way towards some normalization, it remains far behind the Fed. Differentials of 1.35-1.6% have spurred some interest in carry buying dollar-forint.

The only significant data from Hungary recently was yesterday’s current account deficit for Q4 2018. The release missed expectations of a slight reduction at negative 350 million. However, this had negligible impact on the forint’s trading.

Range of data from Hungary this week

This week though is an unusually important one in terms of Hungarian data. There are three significant releases:

Thursday March 28

  • 08.00 GMT: unemployment rate; forecast 4.3%, previous 3.7%

Friday March 29

  • 08.00 GMT: annual PPI (February); forecast 4.6%, previous 3.8%
  • 08.00 GMT: yearly gross wage growth (January); forecast 10%, previous 10.2%

Overall then the releases are likely to be mixed for the forint, although some volatility is likely to accompany Friday’s PPI. That said, many traders are likely to focus as much if not more on data from the eurozone.

Dovish comments from the ECB’s president Mario Draghi tomorrow might have a significant effect on USDHUF as well as EURHUF. Forint traders will also be likely to watch preliminary German CPI at 13.00 GMT on Thursday.

Probably the biggest event among the eurozone’s releases this week is German employment change at 08.55 on Friday. The consensus now is negative 10,000, significantly higher than the previous negative 21,000.

Losses in view for HUF

Fundamentals in general this week suggest further losses for the forint in most of its pairs. However, if the current weak sentiment on growth in the eurozone changes, one would expect the outlook for the forint to change with it.

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