The Hungarian forint has been recovering, since reaching a weak level of 326.5 against the EUR in August last year, to a high of 315.9/EUR in January 2019. Currently, it stands at 318/EUR.
In our view, the appreciation has been helped by an increasingly evident divergence in economic performance between the Eurozone and Hungary, as well as the case strengthening for a mild monetary tightening by the central bank of Hungary this year. Although the central bank has shifted steadily to a mildly more hawkish bias since late last year, the financial markets are barely pricing in any interest rate increase at all this year, while we expect 60bps of tightening.
Going forward, our currency model sees further room for a mild HUF depreciation against the EUR in 2019E and 2020E. Our model predicts a fair value of EUR/HUF 323.7 in 2019E and 330.2 in 2020E, based on the assumption that inflation in Hungary will stay within the lower bound of the tolerance band of 3% ± 1ppt, at 2.4% in 2019E and 2.6% in 2020E, on average. In addition to this, we expect the ECB to keep its policy rate unchanged throughout 2019E and 2020E, and the Central Bank of Hungary to deliver a cumulative 60bps rate hike in 2019E, hiking and maintaining the base rate at 1.5% in 2019E and 2020E, respectively.
For the year-to-date, the forint has remained the most stable currency of the Emerging Eastern European economies, losing only 0.44% against the USD (as of 19 February), compared to: -2.8% for the RON; -1.93% for the PLN; and -1.02% for the CZK (all against the USD). Strong growth, relatively low inflation and growing foreign direct investments have all helped the currency. Going forward, however, the strong economy is likely to mean a modest current account surplus – at least until the new productive capacity is activated; while, on the funding side, there is only slight scope for growing financial inflows, given the modest depth of the bond and equity markets locally.