Two macro charts on the forint dilemma

HUNGARY - In Brief 30 Jul 2019 by Istvan Racz

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The forint was fixed at EURHUF 327.84 today, its weakest ever level to the best of our recollection. As usual, we suspect that the current forint weakness is at least not entirely against the will of the MNB. At least this is what we read from the dovish comments made by the Monetary Council after their July 23 meeting and from the fact that the withdrawal of FX swaps has stopped for now at HUF1704bn in terms of the outstanding stock, just HUF21bn below the end-June level.From the macro perspective, an interesting question is exactly what argument can be brought up in favour of the (moderately) weaker forint and what speaks against it? We offer two charts below to answer both parts of the question.On the desirability of a weaker currency, the foregoing chart presents yoy changes in % for the prices of exports and imports (goods and services) in euro terms, in addition to similar changes by the average prices of domestic demand as well as for the EURHUF exchange rate, the latter calculated for quarterly averages. What we hope can be clearly seen from the graph is that prices of domestic demand have been rising by a yoy 6% or so lately, in contrast to the EUR terms prices of exports/imports, the yoy changes for which have been rarely markedly different from zero. This could have become a tremendous competitiveness problem, should the forint have not depreciated against the euro significantly in May-June 2018, which then raised export and import prices in HUF terms. Now the problem is that the base effect stemming from the HUF depreciation of May-June 2018 is now out of the formula. Should EURHUF stay at Q2's average level in Q3 and Q4, that would bring the yoy weakening ...