Forint Strength Seen as Overdone; Policymakers Likely to Seek Stability
Given the forint’s dramatic 15% appreciation over the last two years, we believe its strength is now overdone. Investors have shifted their view, treating Hungary almost like a eurozone economy, pushing the EUR/HUF pair below 360. This rapid move is a significant shock to an export-oriented economic structure that was unprepared for such a reversal. We anticipate that policymakers will act to ensure stability rather than allow further forint gains, likely guiding the exchange rate towards a 360-370 fair value band. Recent data supports this view, as April’s export growth showed signs of slowing, a potential early indicator of the strong currency’s negative impact. Furthermore, comments from central bank officials in late May have already expressed a degree of discomfort with the pace of appreciation.Investment Strategies and Policy Outlook Amid FX Volatility
This expectation of managed stability suggests that implied volatility in the EUR/HUF options market is likely to decline from its current levels. Selling volatility through strategies like short strangles could therefore be profitable in the coming weeks. We are positioning for a period where sharp movements become less frequent as the central bank subtly signals its preference. Considering the 360-370 range as a target, we see any dips in EUR/HUF below 360 as an opportunity to build long positions. Buying EUR/HUF call spreads is a limited-risk way to position for a rebound back into this perceived fair value zone. Historically, the central bank has successfully used verbal interventions to put a floor under the currency pair after periods of excessive strength. The potential for policy action is reinforced by cooling inflation, which hit a two-year low of 3.4% in May’s report. This gives the central bank greater flexibility to consider future interest rate cuts if necessary to curb the forint’s strength. Such a move would add further upward pressure on the EUR/HUF rate.Start trading now — click here to create your real VT Markets account.
