Will Political Risk Weigh on ‘Undervalued’ HUF?

• We have seen that the selling pressure on HUF has been rising this week following Orban’s victory over the weekend as market has been pricing in renewed political tensions with the EU in the near to medium term.
• As opposed to Poland that has been calling for tougher sanctions against Russia, Hungary has kept its distance from the Ukraine war, and Orban responded to Ukraine President Zelensky following the elections’ results calling him an ‘opponent’.
• In addition, EU Von Der Leyen confirmed today that the Commission has triggered the rule of law conditionality mechanism against Hungarian government.
• The political divergence between Hungary and the EU has been delaying the EU pandemic funds; as a reminder, Hungary is due to receive 7.2bn EUR in grants under EU’s recovery funds, which is worth around 5% of the country’s GDP.
• Hence, even though the HUF is currently trading significantly below its ‘fundamental’ value, political uncertainty may weigh on the forint in the short term.
  • The chart below shows that the HUF is currently the most ‘undervalued’ currency against the USD among the G10/CEE world (nearly -24%).
  • The chart ranks the major G10 and CEE currencies based on their percentage difference between the current spot rate and their 'fair' value, which we define using a Behavioral Equilibrium Exchange Rate (BEER) model (using terms of trade, inflation and 10y interest rate differentials as explanatory variables).
• A weakening HUF also increases the pressure on NBH policymakers as it keeps supporting inflation expectations (Hungary’s public enemy).

Source: Bloomberg/MNI