FX Update: Next two weeks pivotal for whether FX can find a pulse.

HUF: let’s talk about what is actually moving. HUF has been on a tear higher since the central bank finally signaled last month that rate tightening is in order, placing Hungary at the head of line as the country in Europe that will be the first to hike rates. I write “finally” because the negative real yields in HUF were rising to ugly new extremes after the country printed a heady 5.1% headline CPI reading in April. Contrast that with a deposit rate not far above zero. The HUF was on the defensive in part on that negative real rate story in addition to the fact that Hungary has been one of the worst hit by Covid 19 in Europe. With the central bank shoring up the currency, the real yield situation could calm considerably in the next six months, given the HUF is over 6% higher versus the Euro since the weakest levels of March. The hunt for yield is likely a chief driver of HUF upside here, and it is worth noting as the market prices lift-off for the policy rates at the June 22 meeting, yields for HUF bonds has dropped, perhaps on unhedged bets (hedged ones make no sense) from foreigners looking to pick up yield now that the central bank has showing an interest in maintaining price stability. The 10-year Hungarian bond yield has dropped 30 bps to 2.62% since the highs, and yield spreads on foreign currency bonds have tightened a bit as well.

It all looks fine, but at least one note of caution for HUF enthusiasts is in order here, in addition to the likely prospect for a relative shallow path of interest rate hikes from the Hungarian central bank: EU troubles. The EU Court of Justice announced today that it is rejecting Hungary’s challenge to overturn a European Parliament vote to probe into whether Hungary measures up to the EU’s democratic standards. That decision cannot be appealed. The timeline is absurdly slow, as the original so-called Article 7 procedure to investigate Hungary for undermining the rule of law was passed way back in September of 2018, although post-pandemic measures up the risks for Hungary and Poland, which is also the subject of an Article 7 probe, in that only a majority of EU member states need to find the countries in violation of norms for the EU executive to suspend EU funding. (Under the old rules, 26 out of 27 member countries had to vote guilty, with Poland and Hungary vowing one another to block a vote.) EURHUF shorts might consider selling covered puts – have a hard time seeing EURHUF much below 340.

Table: FX Board of G-10+CNH trend evolution and strength
The table below presented merely per habit – trends are very weak in most currencies.

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