The forint may be too strong from the competitiveness point of view at EURHUF 311

HUNGARY - In Brief 05 Aug 2016 by Istvan Racz
As it happened, the forint, which started July trading in the EURHUF 316-318 range, appreciated in the second half of the month to EURHUF 310-312 and has been hanging around that level since then. Given the big external income surplus, such an appreciating trend may easily develop whenever the MNB's loosening / de-sterilization efforts are taking a break, even if only for a short period.But from the point of view of economic fundamentals, this time around meaning competitiveness, the forint may be be just too strong at its current trading level. This conclusion seems to be supported by the June reading of industrial sector data, including producer prices and output:Industrial output growth, producer prices and the EURHUF exchange rate(yoy changes in %)Source: KSH, MNBAs regards industrial output, about two-thirds of which is exported, it fell by 2.4% mom, 1.3% yoy on sda basis in June. As KSH usually does not provide a breakdown for the monthly output data at its first reading, we do not exactly know how much of this setback was due to the car industry (the VW-Audi effect), which is not price-driven. But we are quite sure that output prices had a negative role as well, just as in recent months, or even increasingly. Here the basic fact is that industrial producer prices fell by 2.6% yoy in June and 1.9% yoy in H1. And in export sales, determined to a great extent by the exchange rate, prices fell by 1.9% yoy in June, pulling the H1 change down to -0.6% yoy.It is true, of course, that the overall sales price index is still depressed by the petrochemical industry, where low crude oil prices play a role. But importantly, prices in that sub-sector have just started to reco...

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