"From its March high, Hungarian forint has further strengthened by 14% versus the euro, and although experts unanimously counted on the currency revaluation, its extent was still surprising, states Concorde analyst János Samu in his study, now expecting some forint weakening.Reasons behind strengthening are internal as well as external. Eliminating price band - which undermined credibility and possibilities of the central bank - was undeniably a move of the Hungariam economic policy; in line with this, monetary council had become more rigid. This approach notably worsened investors' outlook positioned on a weakening forint. As a result, they were forced to get rid of such investments, thus contributing to strengthen the forint.
Decrease of the current account deficit and budget adjustment that supported it also had an effect that strengthened forint. As for international impacts, the most important is the trend-like strengthening of other currencies in the region, mainly the Czech koruna and Poland's zloty, which trend has started to speed up last fall. Slovakia's EU connection and its impact on koruna also needs to be mentioned.
The strengthening of forint (more accurately, strengthening of Eastern European currencies) happened together with a drastic jump in oil prices and the unfolding of US mortgage market crisis. It is also possible that the so-called petro-dollars seeking for their positions on international money markets had a significant role in revaluation (through the intense liquidity it assured for retail fx loans of Hungarian banks). The strict monetary policy (with high interest), and local economies' limited dependence on the US economy was probably an attractive target for short-term investors.
Defining the real position of a rate is rather difficult. Investigating last years' volatility of prices, the euro rate weakening below HUF 230 altered from previously set revaluation trends - in other words, forint moved towards a strong position. Based on inflation, increase and balance processes, it is possible that a weaker rate (above HUF 240) would be realistic.
“As for the future, the most likely scenario is permanent revaluation in harmony with economic fundaments,' says the analyst of Concorde. The global economic slow-down is likely to generate the correction of global raw material prices, thus improving inflation outlooks. All this might soften the rather strict monetary policy, in other words, might reduce forint's popularity.
Furthermore, if there is a significant raw material price correction, it might influence the role of oil money, which it plays in global liquidity. Indirectly, a significant correction could also affect funding of Eastern European economies with a gap in the balance of payments. Even if it does not have a direct impact on Hungarian economy, it might still influence the forint.
Another argument for the weakening is that a significant forint appreciation might reduce motivation for liquidating hedge positions, or might even urge further trades - this, altogether, might weaken the forint.
Maintaining current conditions: keeping alive faith in forint's strengthening, stabilizing the central bank base interest rate at today's level, continuing the global liquidity abundance caused by high oil prices - all these factors would indicate further strengthening.
Summary
It is difficult to define the roof of forint's strengthening, but if we take a look at processes that have supported strengthening over the last few months, we can see that the chance of a resettlement have grown. Such resettlement might lead the forint to a level which can more easily be explained. So according to Concorde, today's forint rate versus euro is overvalued; and a 250 rate by year-end is more likely than the current one around 230."
Source: Portfolio Online Financial Journal
24.07.2008