The Hungarian forint continues to rally

Headlines

The Hungarian forint continues to rally

The Hungarian continued to strengthen yesterday in positive market sentiment and the EUR/HUF broke below the 50-day moving average. It was traded in the opening hours around 311.5, which stopped two times the strengthening in the last 2 months. Since the Scottish ‘No’ might extend positive sentiment in Europe the next support level - around 310 – might be tested soon.
Meanwhile, S&P’s sovereign report is schedule for today. Hungary has two notches below investment grade level and a stable outlook. The positive turn in the growth outlook, the tight fiscal policy and the decreasing external debt suggests that the recent grade and outlook will be confirmed, but a positive outlook cannot be ruled out either. The main reason why S&P may not upgrade Hungary (although at the other rating agencies Hungary has one notch better grade) is the almost stagnating public debt and the FX denominated loans.
The next important event for Hungarian markets will be NBH’s rate-setting meeting held on Tuesday (September 23rd). Last time the Council decision was unanimously and the base rate was kept unchanged at 2.1%. Since the ECB cut the base rate by 10bp and the NBH’s reaction was that flexibility has been increased for Hungary as well. It may suggest that they see some room for further loosening of the monetary policy. Despite of this statement we don’t expect rate movement from NBH. The main reasons are that headline CPI started to accelerate slowly in the last two months. Although its level is still low (0.2% Y/Y) it is mainly because of previous public utility cost reduction, the good harvest and the low oil price. The core inflation stuck around 2.5% Y/Y in the last 4 months and projections also reflects that CPI may increase to around 3% at the end of the next year. As the inflation target of the NBH is 3% Y/Y +/- 1%, the forecasted CPI is fully in this range so no monetary policy adjustment is required.