Geoff Yu, BNY’s EMEA macroeconomic strategy specialist, says the robust performance of the Hungarian forint has become detached from its fundamentals following a piercing decline in inflation. January’s pliable print has once again put the spotlight on Magyar Nemzeti Bank’s continued easing, and Yu expects EUR/HUF to move closer to parity, viewing recent moves in the foreign exchange market as unsustainable despite Hungary’s previous attractiveness as a high-yielding CEE currency.

EUR/HUF equalizes the rates

“Hungary’s soft inflation print for January has raised political expectations, including our own. The sharp decline from 3.3% y/y in December to 2.1% y/y in January – the lowest annualized level in seven years – puts Magyar Nemzeti Bank (MNB) back in the crosshairs next week.”

“Given that Hungary is one of the clearest examples of fiscal dominance in emerging markets (EM), the price change will have a large impact on assets – including the carry trade, where HUF has been one of the most recognizable carry trade brands in the CEE/EMEA region over the last two quarters.”

“It is tempting to view the January print as a one-off, but there are some underlying disinflationary trends, such as lower services inflation (though still at very high levels) and continued steady increases in goods prices.”

“Recognizing the strength of the carry trade, we believe EURHUF has been away from fundamentals for some time. Forward spreads are pricing in weaker price growth and carry trade gains in Hungary despite the fiscal outlook, but EURHUF is currently moving on a one-way street.”

“This is not sustainable and we expect EURHUF to pursue interest rate differentials, even if just as a tactical matter ahead of elections, is our preferred view.”

(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)