HUF Set to Rally on Fundamentals If Greece Allows: Analysis

M-T forint strength may be set to resume as long as there is no sharp deterioration in Greece situation, writes Bloomberg strategist Mark Cudmore.

  • EUR/HUF downtrend to potentially reassert and target test of 18-mo. low at 295.62 reached in April
  • Nervousness around Greece developments are setting broader tone for CEEMEA markets but as long as status quo is maintained there, strong Hungarian fundamentals will soon ensure HUF outperformance
  • ECB QE will continue to support inflows to domestic bond market due to high real yields; market is arguably cleaner after Templeton outflows
  • 2-yr HUF swaps yield 1.67% despite Hungary still flirting with deflation; 2015 consensus CPI forecast is still at -0.1%
  • Unlike monetary policy in many other countries, Hungary’s central bank isn’t actively trying to weaken the local currency
    • Money supply remains relatively tight compared to peers
    • They are currently cutting rates at a very gradual and controlled pace of 15bps a meeting
  • Domestic growth picture is exceptionally strong
    • Hungarian PMI today was in expansionary territory for the 22nd consecutive month at 55.1
    • Most recent IP reading at +9% y/y and also been in positive territory for 22 consecutive months
  • Significant improvement in current account, largely due to cheaper energy, is being overlooked and will continue to be another marginal support for HUF
    • Hungary is now forecast to have a record 4.5% CA surplus in 2015 according to a Bloomberg survey, up from 2% estimated a year ago
    • Hungary had a large structural CA deficit until 2009 fallout from financial crisis and first had a surplus in 2010, which has steadily grown since 2012
  • Key risk to the view is Hungary’s vulnerability to any Greece contagion, given the Eastern European nation’s relatively large debt burden and hence reliance on foreign investors
  • During the last two weeks of May, EUR/HUF repeatedly broke the resistance at 309.32 -- the high during Feb. 12-May 17 period -- but has failed to close above that level
    • Daily close below 309.05 would be first technical indication of potential turn in pair; break of 6-wk uptrendline, currently ~308.00, needed for confirmation of a top
  • NOTE: EUR/HUF currently trades at 309.07 after this morning trading at a 15-wk. high at 309.92
  • NOTE: CEE Currencies to Bounce Back After Strong PMI Data: Analysis
  • NOTE: Mark Cudmore is a strategist who writes for Bloomberg. The observations he makes are his own.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE