HUF: Makes sense – Commerzbank

The Hungarian forint has recovered somewhat from its recent low while world markets were in turmoil. It appears that a stronger-than-expected inflation reading for July helped the recovery yesterday, at least at the margin. In July, all three underlying inflation indicators provided by the National Bank (MNB) were strong, with the tax-adjusted core inflation measure rising by 0.64% m/m compared with 0.5% m/m in June, Commerzbank’s FX strategist Tatha Ghose notes.

Slight further rate cuts are expected

“The ‘conditioned reflex’ of the market – wherein stronger inflation data boost the currency and weaker inflation data hurt the currency – need not make rational sense. An upward inflation surprise would help the currency only if it meant that the central bank would adjust interest rates strongly in response; else, the reaction should be the opposite.”

“In MNB’s case, slight further rate cuts are expected, but the base rate level is still relatively high (6.75%) and if monetary easing were to stop after just a 25bp further reduction, then the monetary stance would remain reasonably restrictive. Conversely, a series of further rate cuts could be detrimental.”

“In other words, the sensitivity of policy to inflation is high. Signs that underlying inflation is accelerating can make a significant difference to MNB’s easing plans – perhaps, the July data will have this effect. Hence, it is consistent that the stronger-than-expected July print had a HUF-positive effect.”