Forint is reaching its short-term ceiling vis-a-vis the euro in terms of fundamentals

HUNGARY - In Brief 01 Aug 2017 by Istvan Racz

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What we predicted in our latest reports, that the MNB was going to allow (or even support) the strong forint against the euro in short term - on the back of an ongoing upswing in European industry and with a view to containing domestic inflation - has in fact happened since then. It has gone quite far, to EURHUF 304.82 at end-July, the forint up 1.3% in July and 2% since end-December.Sources: MNB. KSHThis recent trend of forint appreciation was most likely heavily influenced by the euro's upswing against USD and it may be taken even further by short-term capital flows. We cannot tell where the limits of that uptrend are, but we can tell where the limits of short-term forint strength are in terms of fundamentals. Our answer is: right here, at the current EURHUF 305 level. Should the forint go further up in short-term on capital flows, a correction would have to take place on the basis of fundamentals rather sooner than later. OK, but what are the fundamentals that matter here? Clearly, they are merchandise export and import prices, and industrial sales prices - as industry is by far the biggest player in Hungary's (externally) trade sector - and the resulting development of corporate profits.Note: Producer prices yoy change, output yoy change in volume terms; Sources: MNB, KSH, own estimatesOn the chart above, the recent uptick of industrial producer prices, i.e. the return of their yoy changes to the (significantly) positive range in early 2017 has formed the fundamental basis for the subsequent forint appreciation. But in June, when the forint appreciated by 1.8% yoy against the euro in terms of the monthly average exchange rate, the yoy jump by producer prices modera...