After Dodging Rout, Forint May Lose Emerging Currency Top Spot

  • Forint may weaken 1.9 percent by end-March, Commerzbank says
  • ECB stimulus may drive currency gains, according to ING

The tailwind from Poland’s shock downgrade that boosted Hungary’s forint to the top of the stack of emerging markets this month won’t last, according to Commerzbank AG, the currency’s second-best forecaster.

The forint, one of only two developing-nation currencies that posted gains during the January selloff as of Tuesday, may weaken as much as 1.9 percent by the end of March to 320 per euro, said Tatha Ghose, a Commerzbank analyst in London. Oil’s 14 percent slide this year may force the central bank to rethink a pledge to keep borrowing costs on hold to ward off a return to deflation, potentially shifting the focus from Poland’s policy shakeup that led investors to seek alternatives to park their cash in eastern Europe.

"Once inflation forecasts have been lowered, proportionate rate cuts will follow," Ghose said. "The forint’s strength is not all about positive developments in Hungary. It’s benefiting from people having some risk appetite but not being able to invest in Poland."

In addition to growing pressure on policy makers to resume cutting rates that have been at a record-low 1.35 percent since July, Hungary’s economic growth is poised to slow for a second year in 2016, according to forecasts compiled by Bloomberg. The forint, which underperformed Poland’s currency for seven years straight, strengthened 1.1 percent against the euro this month through yesterday, compared with a 4.3 percent drop for the zloty. Hungary’s currency headed for its biggest one-day drop in three weeks on Wednesday.

Policy makers kept rates unchanged on Tuesday, saying they plan to maintain the current level “over the entire forecast horizon,” which is five to eight quarters. They also said they would “closely” examine events abroad, notably measures by the European Central Bank, which said it may reassess its stimulus stance in March. Should monetary loosening be needed, authorities in Budapest said they will turn primarily "to unconventional tools,” which have included steps to cut government borrowing costs and increase lending.

That scenario could be supportive for the forint, according to Andras Balatoni, an economist at ING Groep NV in Budapest, who sees a one-in-three chance Hungary will start cutting rates again.

"If the ECB announces further significant monetary easing and the National Bank of Hungary doesn’t cut rates, the forint may appreciate to below 300 per euro within six months," he said.

The forint weakened 0.5 percent to 313.56 against the euro by 4:50 p.m. in Budapest, the biggest one-day move since Jan. 8. That compares with a record-low 327.57 a year ago, when the Swiss central bank’s decision to end a cap on the franc roiled currency markets.

Deja Vu?

A year ago, the ECB announced its unprecedented bond-buying program, putting pressure on Hungary to follow suit to thwart a strengthening forint and stop deflation. Hungary cut rates in March last year after leaving them unchanged since the previous July.

While the central bank predicted in December that inflation will accelerate to an average 1.7 percent this year from a decline in consumer prices of 0.1 percent in 2015, its executive director, Daniel Palotai, said the monetary authority plans to cut its inflation forecast for 2016 because of the bigger-than-expected plunge in the price of oil.

Hungary’s economy is forecast to grow 2.4 percent this year, down from 2.8 percent in 2015, according to Bloomberg surveys of analysts.

"Rate-setters signalled that downside risks to the short-term inflation outlook have increased, but not yet to the extent that would warrant policy action," said Gabor Ambrus, an economist in London at Royal Bank of Scotland Group Plc, the third-best forint forecaster last year. "Although the monetary council did not, and in our view should not, exclude further rate cuts, we believe it went as far as it can to telegraph to markets that it is not looking to cut rates."

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