Mixed bag of Hungarian fundamentals to increase probabilities of gradual HUF appreciation

We think NBH would remain on hold at its next policy rate meeting if EUR/HUF remains well above 300. Below this, we expect NBH to cut as deflationary pressures may rise from a stronger HUF and negatively impact terms of trade.

It seems NBH is rather open to a higher EUR/HUF - "the weaker real exchange rate may also support a further increase in Hungary's export market share". Terms of trade have improved since mid-2014. Net exports growth was a significant share of Q2 GDP but its contribution had declined compared to Q1. On the contrary, the VW scandal may decrease GDP growth by 0.3% to 0.6% of GDP.

NBH estimates exports and imports to grow this year at 7.9% y/y and 7.6% y/y. Thus a weaker HUF is favorable to Hungary. However, we expect the probability of NBH cutting its policy rate to increase if,

• Inflation continues to deteriorate
   
• GDP growth surprises to the downside
   
• ECB extends its QE program.

We still forecast EUR/HUF lower on the back of improving fundamentals, but the probability of a more gradual HUF appreciation against the EUR has risen. We could foresee EURHUF at 310 and USDHUF at 279 by Q4 end.