The price action in EUR/HUF has been bullish throughout the second half of August. The Hungarian forint serves as a good example of the limit to QE, determined by the value of the domestic currency. If a currency devalues substantially, a central bank will have less room for manoeuvre to increase its QE programme, per Rabobank.
Key quotes
“While the policy rate was left unchanged at 0.6% on August 25 and Governor Deputy Virag reiterated that there is no room to cut rates further, the forint still extended its monthly losses after the NBH increased its bond purchases in response to the finance ministry revising higher its 2020 budget deficit target to 7-9% from 3.8% of GDP.”
“The move higher in EUR/HUF in response to the increase in weekly central bank bond purchases is a warning signal that QE could be reaching its limits in Hungary. Even though the current weekly limit of HUF 40B is well below the initial target of HUF 100B when the program was announced a few months ago, the NBH could be reluctant to boost QE further if the forint remains weak and inflation stays elevated.”
“Should the outlook deteriorate and the pace of economic activity disappoint, the government may not be able to rely on the central bank to step up its weekly bond purchases. Something may have to give and either the NBH accepts a much weaker forint by raising QE or the government may have to cut expenditures.”
“A clear break above the trendline resistance at 356.15 would cement the upside bias in EUR/HUF keeping it on track to revisit the all-time high set at 369.54 in April. Further appreciation of EUR/HUF would unsettle policymakers who could intervene verbally first followed by measures to tighten liquidity to support the forint.”
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