LONG EUR/HUF, USD/HUF, RISING INTEREST RATES IN HUNGARY PRICED IN

Back at the end of June, the National Bank of Hungary became the first of the European Union’s central banks to start increasing interest rates to ward off the possibility of inflation taking off as Hungary’s economy recovers from the global downturn caused by the Covid-19 pandemic.

Moreover, it made crystal clear that it will raise rates further if necessary. Hungary’s “Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy,” the NBH said in a statement.

Inevitably, that led to steep falls in both USD/HUF and EUR/HUF (below) as the increase in Bank Rate to 0.9% from 0.6% was larger than economists had predicted. It was also the first such rise for more than a decade and was accompanied by a Bank comment that it would review the need for more hikes on a monthly basis to tackle price pressures amid a faster-than-expected recovery from the pandemic. At the time, inflation was running at 5.1%, well above the NBH’s 2% to 4% target range.

CHART OF EUR/HUF (DAILY)

Chart prepared by Martin Essex, created with IG Platform

That, however, now looks to be fully priced into EUR/HUF and USD/HUF, and both the European Central Bank – which sets rates for the Eurozone but not for the EU as a whole – and the US Federal Reserve are edging closer to raising interest rates too as inflation fears rise globally.

Neither the ECB nor the Fed are close to raising rates yet. At the time of writing this, the markets were pricing in a tightening by the ECB of just five basis points by the end of next year and a tightening by the US of a still-modest 21bps by November 2022. Still if, as seems possible, inflation fears increase globally and the markets begin to price in rather earlier monetary-policy tightening, those currencies like the Hungarian Forint that have already strengthened maybe those that suffer most.

CHART OF USD/HUF (DAILY)

Chart prepared by Martin Essex, created with IG Platform

Moreover, there are increasing signs of a rift between Hungarian Prime Minister Viktor Orban and NBH Governor Gyorgy Matolcsy over the PM’s 2022 budget, which Matolcsy sees as too expansionary, and if this row escalates it could also weaken HUF in Q3.a