HUF: Disinflation shifts policy expectations – BNY

BNY’s EMEA Macro Strategist Geoff Yu argues that the Hungarian Forint’s strong performance has become detached from fundamentals after a sharp downside inflation surprise. January’s soft print has put further Magyar Nemzeti Bank easing back in focus and Yu expects EUR/HUF to converge toward rate differentials, seeing recent FX moves as unsustainable despite Hungary’s prior appeal as a high-carry CEE currency.

EUR/HUF seen realigning with rates

"Hungary’s soft inflation print for January has upended policy expectations, including our own. The sharp drop from 3.3% y/y in December to 2.1% y/y in January – the lowest annualized level in seven years – has put additional easing next week by the Magyar Nemzeti Bank (MNB) firmly back on the radar."

"Given Hungary has been one of the clearest examples of fiscal dominance in emerging markets (EM), the pricing shift will heavily impact assets – including the carry trade where HUF was one of the best-held CEE/EMEA carry names over the past two quarters."

"It is tempting to see the January print as a one-off, but there have been some underlying disinflationary trends, such as softer services inflation (albeit still at a very high level) and goods’ price growth staying anchored."

"While acknowledging carry trade strength, we believe EURHUF has detached from fundamentals for some time. Forward spreads have been pricing in weaker price growth and carry gains in Hungary despite the fiscal outlook, but EURHUF has just been on a one-way street."

"This is not sustainable, and we expect EURHUF to converge toward rate differentials, even if only on a tactical basis ahead of the election, is our favored view."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)