BNY’s Geoff Yu argues that Hungarian asset positioning is stretched after elections, with markets now watching the central bank of Hungary Magyar Nemzeti Bank's (MNB) upcoming decision. The new government prioritizes lower debt costs over Hungarian Forint (HUF) strength, aiming to attract duration flows via fiscal prudence. Yu expects unchanged policy, but warns HUF is leading carry unwinds and still needs a solid real-rate buffer.

MNB seen steady as HUF leads carry unwind

"We maintain that positioning across Hungarian assets hit its limits in the run-up to and wake of the election, as the new government must now deliver on the change it promised. The foreshadowing of a sharp fiscal adjustment due to the previous government’s “budgetary failure” should help obviate the need for additional restraint from the central bank, while a funding deal with the EU is also expected very soon."

"Finance Minister András Kármán also laid out fresh criteria for market confidence, stating that “the drop in risk perception should primarily be expressed via a lower cost of debt financing and not necessarily via an excessive forint appreciation.” In this context, the new government is clearly not targeting short-term carry inflows to bring down inflation, but rather a reduction in term premia through greater fiscal prudence. We suspect the view is that if the market believes in fiscal plans and unhedged bond purchases materialize, the currency will take care of itself."

"Next week’s decision will test the thesis that markets will gravitate away from short rates and more toward duration. The recent MNB surprise cut on its interest rate on foreign-currency swaps, pointing to an “improving market and liquidity conditions,” suggests the MNB is also more relaxed about FX performance. This points to an unchanged decision, while maintaining vigilance in line with peers globally."

"This doesn’t mean that the FX angle should be abandoned completely – our data indicate that HUF is now leading carry trade unwinding, and CEE is also one of the worst-performing currency aggregates. Holdings are relatively comfortable, but if the global inflation shock is more prolonged, a sufficient front-end real rate buffer remains necessary."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)