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FUNDAMENTAL ANALYSIS

EUR/HUF: Indirectly Speaking

EUR, HUF, Indirectly Speaking, Monetary Council, Fundamental Analysis, fx trader, forex

18 May 2016

At the 26 April MNB Monetary Council1 meeting, it was decided to reduce the base rate a further 15 basis points to 1.05% as well as the overnight collateralized lending rate 15 basis points to 1.30%. The overnight deposit rate remained unchanged at -0.05%. In the released press statement, the council was satisfied with the current rate of economic growth, but added a hint of frustration about “...persistently below target inflation...”

The MNB has good reason to be concerned about inflation. The economy is growing with price deflation. The Hungarian economy is one of three CEE-EU members benefiting from shared manufacturing trade with its fellow EU members and particularly that of Eurozone member Germany.  Over 70% of all exports are destined for EU member states; 27% of total exports are destined for Germany. Conversely, over 70% of total imports originate from within the EU and 25% of total from Germany. Nearly 40% of total exports to Germany are vehicles or vehicle related, including construction and agricultural vehicles. Clearly, the last thing the MNB would want to have strong Forint against the Euro.

The MNB noted that the economy grew at an annualized 3% rate, after a slowdown in 2016 Q1: “...Annual growth in industrial output in February was lower than the high levels recorded at the end of 2015, and the volume of construction output also fell relative to the same period of the previous year...”  The MNB did observe an increase in retail sales and that makes sense with the increasing purchasing power of the Forint.

It’s likely that Hungary is importing deflation. Vehicles and vehicle related items rank first in imports and account for nearly 12% of total. It’s second largest import is energy which accounts for nearly 11% of total. Metals and metal parts account for nearly 9% of total imports. Hence, the three major import components are either price deflated commodities or Euro-weakened goods.

It has been just about six weeks since the last ECB action which pushed rates further negative to -0.40% and expanding the monthly purchase target, the type and duration of the asset purchase program. The Forint has managed to hold its ground vs the Euro, trading in a range of Ft 307.50 resistance to support of Ft 316.00.

EUR, HUF, Indirectly Speaking, Monetary Council, Fundamental Analysis, fx trader, forex, EUR HUF Price Event ChartPrice Event Chart

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