In the last 6 years, we have not really been able to enjoy the benefits of the independent currency: from 2018, a devaluation trend started, while the economy was still fine at the beginning of the period. In 2022, the forint collapsed, then the MNB had to save it, which was quite an expensive operation and brought a very high interest rate, which has not yet been able to be reduced to the regional average.
Reinforced level
In the past six months, the behavior of the domestic currency has been frightening many times: after last year’s relative calm, it started to weaken several times and came frighteningly close to the psychologically important level of 400 per euro. In the end, he did it so many times that this number became final not only on a psychological basis, but also on a technical basis. It is a very strong support, from the side of the euro, resistance has developed.
Image: Economx
If we look at the graph, we can see that in 2018, after several years of stability, a weakening trend emerged, which is still valid in the technical sense, as higher and higher lows are visible in the euro exchange rate. However, since the crash of 2022, the 400 level has become a strong resistance, and the euro is far lower than it was then. In this sense, the weakening forint trend has been interrupted. The two lines on the graph are approaching each other: you will soon decide which trend is valid.
The devaluation backfired
Regarding the downward trend that started in 2018, we can almost certainly say that it was a deliberate economic policy decision: they hoped for greater exports, an economy under greater pressure, a national debt denominated in forints and thus inflated in euros. However, in developed countries similar to ours, this is no longer used, because there is no need for it: it was justified in the 90s, after the regime change and during the Bokros package.
The idea didn’t even work: at first, the only negative effect was that it eroded the Hungarian wage level in euros, so despite the high nominal wage increase in forints, wage catch-up slowed down, and we lagged behind our peers in the region. The bigger problem was that, as a result of the combined effect of the extremely loose monetary policy and the devaluation of the forint, the inflation shock in 2022 was much bigger in our country than anywhere else in Europe.
Stability
After that, both the central bank and the government indicated that the weakening of the forint was not desirable: so far this year, central bank governor Barnabás Virág has been extremely firm in this regard. We cannot rule out that the central bank intervened in order to stabilize the exchange rate, which it can safely do in light of the abundant foreign exchange reserves and the foreign economic balance that is favorable from the point of view of the exchange rate.
Fundamentals
We have discussed several times why the forint began to weaken again and again, instead of reaching last year’s stronger levels, despite the persistently positive balance of foreign trade and balance of payments. Investors may have been worried about the high budget deficit: this concern has visibly decreased in the last 10 days after the government decided on a budget adjustment. In addition, the constant tension between the government and the European Union is worrisome, and with it the stagnation of additional EU funds, some of which may be permanently lost beyond the given deadline.
However, these only temporarily act as a weakening factor, because all investors leave, a part of Hungarian savers flees to the euro, or maybe takes it abroad, but after that the process ends, because the mentioned problems have existed for a long time, and those who wanted to, have already dealt with them. What may worry market participants much more, and thus become self-fulfilling, is the fear of further devaluation.
Escape to Europe
The long trend that can also be seen in the graph is vividly alive in many people, they have a hard time forgetting what a permanent devaluation we have gone through, and they can logically think that if this trend continues, it is better to keep the euro. The interest rate surplus available with the forint has decreased a lot compared to before, so if foreign investors fear further devaluation not so much as household savers, they will switch to euros, and this may already be a level of process that alone maintains the devaluation pressure due to the strong demand for euros.
It now seems that the round number 400 depends on how the expectation of devaluation and, accordingly, the fleeing to the euro by the population, one might say euroization, will develop. if the euro exchange rate does not exceed this, there is no trend-like weakening, stability is established and fears are reduced. This is now also supported by the technical analysis, because this level has strengthened more thoroughly, and serious resistance has formed there in euro.
Now it’s all about one number
The fate of the forint thus depends on this level. If the level is not damaged, the exchange rate will stabilize, and once the flight to the euro is moderated, the devaluation pressure will cease, and the exchange rate will remain stable even without possible help from the central bank. If, on the other hand, a breakthrough comes, or the level simply becomes a gateway, it would indicate that the forint is the only one of the EU currencies that can continue to weaken. We assume that the central bank will not allow this in the short term, so that stability will be maintained, in the longer term the question can be decided by whether the economic policy based on devaluation has been permanently removed from the agenda.
Source: www.economx.hu
