Hungarian National Bank preview: Proceed with caution | Article

EUR/HUF rose from just under 400 to 393 in August and we believe we can reach 390 by the NBH meeting, the level before the last meeting in July. Of course, the market has roughly priced in a rate cut and at the same time the rally in core rates has helped the forint with support from higher EUR/USD. Overall, the general conditions are supportive for the HUF, which could keep the NBH open to rate cuts again despite higher inflation numbers. A rate cut in August seems unlikely, but the question for this meeting is when to expect another rate cut later in the year. In our view, levels in the range of 390-392 EUR/HUF will be a reason for an upside turn. In the medium term, we maintain a trading range of 390-400 EUR/HUF for the rest of the year as we expect two more rate cuts and a more complicated situation with rising inflation and a weaker economy than the markets currently expect.

After a correction of the very dovish pricing, the market now expects two or slightly more rate cuts this year, which is roughly in line with our economists' expectations. The terminal rate has returned from the lows of 4.60% in early August to the current 5.00%, but the slope of the IRS curve remains almost unchanged. We believe the entire curve therefore still has room to move down, potentially offering the best valuations within the CEE region, especially at the longer end of the curve and at a premium to core markets. So if we see further signals from the Fed and the European Central Bank, we believe this, supported by the dovish stance of the NBH, will attract buyers back into the HUF market.

We are similarly positive on Hungarian government bonds (HGBs), which have the highest market interest in the CEE region. On the supply side, the debt agency has covered around 80% of this year's HGB issuance, according to our calculations. Meanwhile, recent fiscal data showed an improvement and gives hope of meeting this year's fiscal deficit target of 4.5% of GDP. This would allow for a reduction in supply later in the year or a focus on pre-financing needs next year, freeing up the debt agency. Overall, therefore, we see conditions for a rally in HGBs, while valuations remain rather neutral relative to CEE counterparts.