EURHUF at 316: first tentative thoughts on renewed forint strength

HUNGARY - In Brief 31 Jan 2019 by Istvan Racz
1. EURHUF fell back to around 316 in the last 24 hours, continuing its strengthening trend taken in mid-January. Information available, mainly data from the MNB, suggests that this trend is entirely market driven: especially nonresidents are building up speculative positions in favour of the forint.2. This could not happen if the MNB did not want it to be so. The whole strong HUF trend was started by Mr. Nagy's statement on January 16 in the first place. On January 29, the Monetary Council did nothing to stop it. And the MNB is not using its powerful FX swap instrument to contain HUF strength either, unlike in May 2018, when it intervened in the opposite direction: it poured liquidity on the market through FX swaps to facilitate for banks to buy up some HUF500bn of government bonds in the face of marked selling by bondholders and heavy issuance by the ÁKK, and sent the HUF to much weaker levels as a result. But at that time, the MNB was still sitting on a different horse.3. This means that the MNB is not preparing to start tightening at any future date. It is already doing so. The EURHUF exchange rate is by far the most efficient way of short-term MNB tightening. Thus the MNB is not only waiting to see if adjusted core inflation actually reaches or exceeds 3%, but it is making efforts to avoid it.4. Is this sustainable? Hardly so. The stronger forint is just pushing the existing domestic inflationary pressure over to the BOP's side. The BOP had a very small fundamental surplus (meaning the net financing balance) until Q3 2018, but it was deteriorating at significant speed in October and November, according to preliminary data. This marks the existence of very strong do...

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