Mirror level increases USD chances for a rebound

2 Jul 2023

For the last nine months, USD/HUF has been in a downtrend erasing all gains made last year. However, I believe it could change in the second half of the year.

The currency pair reached the key support level of 340 HUF per USD in April. Since then the USD price has been anchored to the level. Before the spring of 2022, the level of 350 was the key resistance level, the pair knocked on the level in April 2020 and March 2021 (the next month it broke through). This year it is the floor or the mirror level (i.d., the level that previously played the opposite role for the price). By the way, the same mirror-level case with EUR, only the floor is different, it is 370 HUF for EUR. It is more robust than the dollar one. It has prevented four forint deterioration attempts.

I think there is a little chance that the USD will break through the support, but a high chance that it will rebound to the first target of 380. On the daily chart, I can estimate that consolidation has done most of its way and the USD bounce may start during the month. But on the weekly and monthly charts, the consolidation may be prolonged and take 4-5 additional months.
In case, I am mistaken and the floor brokes, the forint would grow to 320 until this October.

From the macroeconomic perspective, my outlook is mixed negative for forint.
On one hand, Hungary has the highest rate in the EU, making short of forint to USD or EUR an expensive position. The interest rate is 13%.
On the other hand, the rate has been increased to combat high double-digit inflation, which is also the highest in the EU, in the previous autumn, the national bank launched a new one-day deposit rate HUINTR . Currently, it is 16%, but a few months ago was 18%. The high deposit rate has motivated private banks to deposit their funds in the national bank.
The national bank previously incorporated quantitive easing and bought assets in its portfolio, but nowadays experiences severe capital stress. Due to a decrease in the portfolio and expensive interest costs coming from the expensive deposit rate, its equity has shrunk and become negative!
According to EU laws, the Hungarian government must capitalize the bank in 2024. It will cost around 0.5% of countries GDP. News agencies suppose the government will ask the ECB to suspend this regulation and postpone the national bank recapitalization. It happens on the background of a permanent government deficit between 4-6% HUGBP . This year they expect around 4%.

The economy is in stagflation, and GDP has contracted for the consecutive quarters HUGDPQQ . Hungarian consumer is under the pressure of high inflation that devalued their income resulting in the retail sales collapse HURSYY .
The economic crisis will decrease government incomes HUGR, making it impossible to shorten the government deficit, so Hungary will again become active as a borrower HUGDG .

The high interest rate has affected the money supply. The monetary base HUM0 has doubled over the last ten months, while the money supply HUM2 has noticeably contracted in real and nominal terms in the amount of 6%, that for the current fiat economy is a rare event. I expect a gradual decrease in the national bank deposit rate. It would induce credit activity and money supply growth and monetary base reduction.

An additional supporter of HUF's strength is current account recovery. Hungary is heavily dependent on fossil fuels import. This year TTF ICEEUR:TFM1! drop helps to drastically decrease natural gas expenditures and reduce HUF conversion to foreign currencies. It could save about 5% of countries GDP. Instead of 8% of the current account deficit HUCAG , the country would have 3%.
Tight relations with the EU, and partly frozen EU funds also negatively affect on Hungarian economy and forint perspectives.

Non-EU possible market-moving events:
There is only one important: the American economy and the Fed USINTR interest rate.
American money supply USM2 shrinkage may ignite a recession this year, forcing the Fed to decrease the rate. Undoubtedly, the recession would become a shock for the Hungarian economy and forint. I doubt that a drop in the Fed rate and widening interest rate difference will support forint in a short time. Conversely, the shock would drive risk aversion from the developing markets and Hungary, as well as, creating waves of chaotic forint sales. The contraction of the American economy would also motivate the national bank of Hungary to cut its rates critically supporting forint short-sellers activity.

The minor risk is natural gas deliveries HUNGI from Russia. If something happens with the Ukrainian gas pipeline, the Hungarian economy will suffer, creating forint vulnerable to the consequences. In this case, the Turkish stream may be a backup transportation route for Hungary.

29 Jul 2023

Catatan

The month is almost over. Performance of USD and EUR vs. HUF in July showed that support levels of USD/HUF and EUR/HUF worked and moderate forint depreciation started. I expect the continuation of growth in both currency pairs in the next three months.

26 Agu 2023

Catatan

In recent weeks USDHUF traded in the range. I believe next month, it will continue evolving between 345-365 forints per dollar.
EURHUF also traded in the range and would continue its development between 372 and 393.
Inflation continued to slowdown, printed at 17.6% YoY in July and the national bank carried on with its rate cut.

No doubt the policy will be continued and inflation will continue its decrease. Additionally, the National Bank informed that it increased its foreign exchange swap amount from EUR 5 billion to EUR 6 billion in September.

The Hungarian economy remains in recession (both quarterly and annual growth fix negative figures).
With current high inflation, it is better to say the Hungarian economy is in stagflation.
The monetary base progressed with its growth, while money supply M2 extended its losses

The shrinking money supply in nominal terms was 6%, but in real terms, it means 'minus' 6 'minus' 20 (June inflation) results in a 'minus' 26% collapse in real terms. It is cooling inflation with negative effects on economic growth, reinforcing economic reduction. I doubt that the national bank will tolerate it. It already started to decrease its special rates introduced in 2022. I estimate the national bank would increase its rate cut and would start cutting its base rate soon, which has remained at 13% since September 2022.
The contraction of interest rate differential may provoke foreign currency buyers' interest. It could happen in the last months of the year.