Recent Pullback in EURHUF In-Line with Recovery in HUF FRAs

6x9 HUF FRAs have recovered from lows printed on Jul 5, broadly in-line with the near 3% pullback in EURHUF from its recent high. This may suggest that while carry returns have slowed in HUF, the attractiveness of the trade remains resilient despite the ongoing NBH easing cycle. However, uncertainty over the pace of disinflation in Hungary and the Eurozone, developments on the EU funds front and wider market sentiment leave the projected path of the base rate ambiguous beyond September (before which monthly 100bp cuts to the effective rate are well-telegraphed) and therefore means a cyclical move higher in HUF is not yet a foregone conclusion.

• A bout of broader market risk-off or less favourable developments on the EU funds front may provide headwinds to the Forint going forward. On the other hand, some sell-side desks have noted that recent HUF weakness could prompt the NBH to slow down the easing of the effective rate given the sensitivity of the MPC’s near-term reaction function to FX developments. Such moves may impact the lifeline of the HUF carry trade.
• This week’s weakness shows EURHUF continuing to retrace a portion of its recent gains. The cross is now approaching key support levels at 375.71, the 20-day EMA, and 374.46, the 50-day EMA, a break of which would be a bearish development. However, the move lower is likely a correction and overall conditions remain technically bullish following a breach of key resistance at 378.79, the May 19 high. Top side focus remains on 389.13, the 61.8% retracement of the Mar 20 - Jun 12 downleg.