EUR/HUF: One Obstacle After Another

EUR, HUF, Magyar Nemzeti Bank , One Obstacle, After Another, Fundamental Analysis, fx trader, forex

13 Apr 2016

Magyar Nemzeti Bank had overcome a major economic hurdle by teaming up with the government and private sector in order to resolve the foreign mortgage loan issue. Further, it managed to resolve the issue with a recently elected conservative government which opposed any public bailout. Further, the increasingly strengthening Swiss France made it all the more difficult.

The MNB had been wratcheting down the base policy rate for several years and had declared an end to the easing cycle in July of 2015. So after one last reduction to 1.35% the MNB noted that “...In the Council’s assessment, the policy rate has reached the level which ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy...” At this time the Hungarian economy was one of the better performing in Europe1, due mainly to manufacturing sharing with Germany2.

About 50% of Hungarian exports are destined for the Eurozone and nearly 18% for the non-Eurozone EU members. Conversely, about 45% of imports originate from the Eurozone and nearly 20% from non-Eurozone EU members. Hence, it’s in the interest of the MNB to maintain as close to an exchange parity as possible. From the beginning of 2015 until the MNB announced the end of its easing cycle, the increasingly worsening refugee crises was creating political divisions within the EU and notably between Germany and Hungary. Under normal conditions, politics wouldn’t have a significant impact between nations. However, in this case some analyst began to reduce Hungarian GDP expectations3. For example, Brown Brothers Harriman warned “...Despite solid fundamentals, we do not see how Hungarian equities can continue to defy gravity in this extremely negative EM environment, especially with GDP growth slowing… the forint is unlikely to escape the carnage in EM FX...” 

To make matters worse, not only were Hungary’s political ties with Germany strained, the Volkswagen emission fixing scandal would likely have an impact on the strong auto manufacturing sharing relations with Germany4.  Bank of America had noted that “...The importance of the auto industry and the strong linkages to German producers put central and eastern Europe in an exceptionally vulnerable position to the Volkswagen fallout... ...The Czech Republic and Hungary are likely to be affected the most...”