EM Focus: Further Downside For USDHUF In The Cards

The last time we visited USDHUF technicals was in a August 26 blog that dealt with potential emerging market trade setups. We highlighted the potential the downside in USDHUF was promising with a possible break below the 221.82 support level. (For details, please see "FX Update: Potential trading setups in EM for the week ahead").

The trading action in USDHUF since saw the pair initially being up to 230.00, where the buying interest was again strongly reversed. Upon subsequently breaking the key support level we had highlighted as being a potential trigger for the downside pressures to accelerate, the pair hit our initial technical target in a fairly rapid move. This downside development in USDHUF has paved the way open for further downside momentum to build. With this in mind, at bottom we provide for a fresh outlook for the pair, again stressing the key downside dynamics.

As we had anticipated in our previous blog, the National Bank of Hungary (NHB) has continued to ease policy rates with small, incremental cuts of 20 basis points. With inflation expectations well in check, this policy of small cuts is likely to remain in place in the remainder of 2013, while NHB also conducts further easing policies through a subsidised loan program called Funding for Growth. The merits and associated long-term risk factors of such easy monetary policies aside, the Hungarian economy is finally out of recession, with very modest yet positive growth numbers for first half of 2013.

While the forint continues to be surrounded by political risk factors, Hungary's current account surplus continues to give the currency an important degree of support that is missing in those emerging markets that are exposed with current account deficits. While the structural problems need to be overcome for a sustained and improving growth, the gradual improvement in external conditions is also good for the forint. All in all, while the fundamentals in Hungary are thus still on a somewhat shaky foundation, the improving overall picture allows for further gradual appreciation of HUF against USD.

Technical downside in USDHUF remain intact

Since our last technical piece on USDHUF our technical target, which was to test July lows at 216.95 has been achieved, confirming the bearish bias in the process. As the trend line support from the October 2012 lows was broken in last week’s trading, we now look for a break of 216.93 in the short term. This would give scope for additional downside momentum with a potential target on the medium term horizon of 210.15, which is the 38 percent retracement level in the bigger 142.78-252.09 wave.

On the flipside, for the above-mentioned technical bearish bias to change to a more neutral stand, we need to see a daily closing above the 222.45 level. Such a closing would leave USDHUF back in the congestion zone, where the pair has been trading in since the beginning of 2012.