The forint survived the seemingly fatal blow

This year, the forint has performed more and more poorly, but the 400 “limit” has been a stable resistance until now, and the euro exchange rate has not crossed it. The importance of this could not be emphasized enough, because it is not only a technical level, but also a highly psychological one, the permanent crossing of which could permanently shake confidence in the stability of the forint.

Last week, the level was finally crossed, and the only question was whether it was a temporary situation, a spike on the graph, or whether the exchange rate was permanently stuck on the weak side. Fortunately, based on Wednesday’s movements, it seems that the first scenario is coming true: the exchange rate of the euro has returned to below HUF 400, not to a small extent.

Budget impact

The favorable turn can be the result of several factors. In terms of fundamentals, there have been so many changes that the state budget in September showed a surpluseven if this was largely due to the use of EU funds. This increases the likelihood that the amended 4.5 percent deficit plan will be maintained, and also Finance Minister Mihály Varga confirmedthat they plan to maintain the deficit level, and also announced that they will submit next year’s budget in November, which they plan to adopt by mid-December.

Geopolitics

The possible geopolitical effects could not have been significant in the case of the forint, but if they had a weakening effect, it subsided, just like in the case of oil, where a very sharp price increase was followed by a drop. Although the Israeli retaliatory strike against Iran is still to come, the role of Iranian oil is not significant in the world’s total supply due to the sanctions, so a decisive change, an oil shortage, would probably only occur if shipping in the Strait of Hormuz were to be blocked for some reason and thus the oil transport, however, the market does not give this much of a chance.

Central bank indication

In addition to all this, we cannot rule out that the Magyar Nemzeti Bank (MNB) also had an impact on the exchange rate. According to Bloomberg’s information, Barnabás Virág said at a background discussion with investors on Tuesday that

This indicates that the MNB will not cut interest rates at the next interest rate meeting on October 22.

This indicates the central bank’s commitment to the stability of the exchange rate and the market in general, and we cannot rule out that they intervened directly in the market, but they do not provide information about this. The defense of the 400 level is logical, because trust in the forint can only be built again in the longer term if this limit proves to be permanently impassable. Short surges may occur, as it happened now, if only to make it more difficult to open speculative positions that could potentially trigger central bank intervention.

Can trust be restored?

If confidence in the forint were to be restored, i.e. the market participants would assess that the weakening trend since 2018 is finally a thing of the past, then the exchange rate could even strengthen somewhat, because if there is no escape from the forint, then the surplus current account will stimulate demand for the forint influence may be the primary factor in the market.

Of course, confidence requires longer-term stability, the 400 level cannot become a gateway for a long time, and sooner or later the forint must move away from it in the strong direction.

The biggest boost in this could be if the relationship between the government and the European Union were to improve to the extent that it would be possible to release the frozen funds, but the chances of this are extremely difficult to estimate. It would also help a lot if by next year the budget deficit were already close to the 3 percent level considered acceptable in the longer term, that is, it would appear that not only inflation, but also the extent of the budget deficit could reach the target value in the coming years.