(Bloomberg) -- The forint is poised to extend its status as the underperformer among eastern Europe’s currencies, according to a growing chorus of strategists from Barclays Plc to Citigroup Inc.
Hungary’s growth remains anemic amid a decline in investment due to a European Union funding freeze over rule-of-law concerns. Furthermore, there is no end in sight to years of budget overshoots. All this makes the forint highly vulnerable to swings in global risk appetite and paints a rather bleak outlook for Hungarian assets, the strategists say.
The forint weakened against the euro for three consecutive days after Bloomberg reported last week that Prime Minister Viktor Orban was planning to ditch budget austerity and may roll out stimulus measures instead. That potential move away from fiscal consolidation ahead of the 2026 elections is set to weigh on its currency in the medium term, analysts at Erste Bank said in a report Wednesday.
“Economic recovery proved to be disappointing, as investment activity has been diving,” Erste said in the report. “Public consumption also did not support the growth, as was the case in other CEE countries,” Vienna-based analysts Juraj Kotian, Katarzyna Rzentarzewska and Jakub Cery wrote.
Earlier this week, Citigroup recommended selling the forint against a euro-dollar basket via 3-month forwards, also citing the weaker fiscal stance. Citi set its targets at 404 to 405 per euro and 366 to 367 per dollar.
The forint traded at 396.2 per euro and 359.3 per dollar by 2:34 p.m. in Budapest. It has shed 3.3% against the common European currency this year, twice as much as the losses by the Czech koruna and compared with an appreciating Polish zloty.
High Beta
Barclays added the forint will remain on the back foot due to its high sensitivity to global risk sentiment.
“In addition, we expect Hungary’s still-poor economic momentum and ongoing carry erosion to add further pressure on the HUF in the medium term,” analysts Ercan Erguzel, Andreas Kolbe and Marek Raczko wrote.
There are also risks over the course of monetary policy as Orban seeks to replace central bank Governor Gyorgy Matolcsy with one of his ministers. Barclays said the new appointment will be the “most important development” in the country’s rate trajectory next year.
For now, the central bank reiterated it will remain attuned to swings in sentiment, a clear signal that it keeps a watch on the currency due to its effect on inflation.
“Looking ahead, risks surrounding international and domestic disinflation, as well as the volatility in investor sentiment warranted a careful and patient approach to monetary policy,” rate setters said according to the minutes of their August meeting, published Wednesday.
The bank paused its easing cycle last month, and Barclays expects the Monetary Council to keep reacting to any “excessive” forint depreciation with a “hawkish turn” in its rhetoric.
“This should cap the near-term weakness in HUF,” Barclays said.
--With assistance from Kerim Karakaya and Peter Laca.
©2024 Bloomberg L.P.
