Currency Warrior Hungary Seen Targeting De Facto Cap on Forint

  • Central bank sees forint strength undermining export appeal
  • Stealth intervention seen as currency surpasses 310 per euro

Hungary is the latest country to enter the global currency war.

The eastern European nation’s central bank -- which has said it has no exchange-rate target -- has gotten into the habit of announcing stimulus to curb the forint’s appreciation whenever it approaches 310 per euro. Now with the currency trading near a six-month high, policy makers have abandoned a commitment not to cut interest rates until 2018.

"Cutting rates would mean the National Bank of Hungary is joining a fairly large group of central banks involved in foreign-currency wars," said Piotr Matys, a strategist at Rabobank International in London. He said monetary easing won’t be enough to stop the forint strengthening to 300 per euro as investors seek higher-yielding currencies. "The central bank has had a preference for a weaker currency for a while.”

The shift puts Hungary in the company of developing countries from China to the Czech Republic weakening their currencies to help exports. The forint, the best-performing currency in emerging Europe this year, threatens to impinge on Hungary’s export competitiveness as growth lags behind regional peers and inflation falls short of the central bank’s 3 percent target. Prime Minister Viktor Orban has relied on booming automotive and manufacturing industries as the driver of growth in the $138 billion economy since winning elections in 2010.

‘Indirect Impact’

The forint has been retreating from its six-month high on Feb. 22, two days before the central bank signaled it was ready to lower borrowing costs for the first time since July. The currency was little changed at 309.93 per euro on Tuesday after depreciating 0.6 percent on Monday. Options trading suggests further weakening: the premium for three-month contracts to sell the forint versus the euro over those to buy has widened to 1.55 percentage points, close to an 11-month high and up from 1.2 percentage points at the end of last year, data compiled by Bloomberg show.

The National Bank of Hungary said it doesn’t have an exchange-rate target and the currency only has “an indirect impact on the central bank” policy, according to an e-mailed response to questions.

Nomura International Plc sees the forint weakening to 325 per euro by year-end, while Raiffeisen Bank International AG anticipates monetary policy will trigger depreciation toward 320 by Dec. 31.

‘Counterbalance’ Policy

"The central bank will continue trying to counterbalance any forint appreciation toward 300 per euro as it aims to support the economy through a weaker exchange rate," said Wolfgang Ernst, a currency analyst at Raiffeisen in Vienna.

After holding its benchmark at 1.35 percent since July, the National Bank of Hungary opened the door to potential rate reductions as the lowest oil prices since 2003 sap price growth, Vice Governor Marton Nagy told reporters on Feb. 24. Policy makers would probably first adjust overnight deposit and loan rates in March before considering a cut to the three-month deposit rate in May at the earliest, he said. Previously they had pledged to keep the main rates on hold until the end of next year.

One challenge for policy makers trying to temper the forint is that it’s becoming a haven from global market turmoil. The nation’s current-account surplus means it’s not reliant on foreign money to fund its budget, which is stoking speculation its credit rating will return to investment-grade this year. Inflows of European Union development funds are also helping.

Negative Rates

Negative rates in the euro zone, Hungary’s largest trading partner, make the nation’s policy look tight by comparison. That’s pushing up the forint’s value versus the euro, with the European Central Bank forecast to cut rates further this week.

“There has been a hint of dissatisfaction with the level of the forint and the about-face in rhetoric” by policy makers is a reaction to that, said Peter Attard Montalto, an analyst at Nomura in London, the most bearish forecaster of the forint along with Commerzbank AG and Landesbank Baden-Wuerttemberg. "The central bank has an implicit, unstated 310 per euro cap on the forint."