Hungary's Forint Plunges to 27-Month Low as Ukraine Unrest Hits Trade

The Hungarian forint has ended its eleventh straight week of losses as escalating tensions on the Russia-Ukraine border have badly hit Hungary's trade.

The USD/HUF pair on Friday rose to as high as 242.695, a 27-month high, but the overall drop in the euro pushed the EUR/HUF cross to 313.65 compared to the 26-month high of 317.35, touched in the first week of August.

Escalating geopolitical unrest in Russia and Ukraine as well as the Middle East has been weakening emerging market currencies broadly, but Hungary has even more reasons to worry over the Russia-Ukraine issues.

Hungary shares a border with Ukraine and its exports to Russia amounted to 753 billion forint ($3.2bn) last year, according to government data.

According to option prices, there is a 52% probability the forint will decline to an all-time low of 324.25 against the euro this year, compared with a 32% likelihood in May, a Bloomberg report says.

The Hungarian currency is down 5.2% against the euro and has fallen more than 10.7 against the dollar so far this year.

The Hungarian central bank has been on a long-stretched cutting cycle and the main lending rate is now at 2.1% from near 3% at the end of last year.

Economic data from the eastern European country, however, are not that bearish. The inflation rate has rebounded to 0.1% in July from -0.3% in the previous month.

The GDP rose to 3.9% in the second quarter from 2.7% in Q1 while analysts were expecting a rise up to 3.5%.

The forint's plunge despite better data prints is mainly attributed to the Russia-Ukraine unrest.

The 8 September trade data from Hungary may show the impact of the war, and in such a scenario, the forint will see a steeper fall against the euro as well as the greenback. Hungary has a trade surplus of 179bn forint as per the June data.

The Hungarian central bank will announce rates on 23 September and the market consensus is for another 10 basis points reduction in the main rate to 2%.