USD/HUF hits 18-months highs above 328.00 as CEE currencies weighed by lockdown fears

• USD/CHF went above 328.00 for the first time since May 2020 on Monday amid Europe lockdown fears.
• Interest rate hikes from Hungary’s central bank have failed to prevent a weakening of HUF in recent weeks.

USD/HUF hit fresh 18-month lows on Monday, with the pair briefly eclipsing 328.00 for the first time since May 2020, up slightly more than 0.5% on the day. The more heavily traded EUR/HUF pair hit a fresh record higher above 370.00 for the first time ever. Central European currencies have been under pressure at the start of the week amid concerns about lockdowns in the region scuppering the prospect for continued economic growth. The Polish Zloty hit its weakest versus the euro since 2009.

On Monday, Austria became the first nation in Central/Western Europe to implement a full lockdown on all of its citizens. The Czech Republic, meanwhile, implemented new rules saying only those who are vaccinated or have recovered from Covid-19 in the last six months can enter restaurants or use other services.

A rapid rise in interest rates in Hungary and Poland has not been enough to stem recent currency weakness, seemingly reflecting concerns that the two countries’ central banks may risk failing to fill their inflation mandates in the medium-term. For reference, the YoY rate of CPI in Hungary hit 6.5% in October, while the Hungarian central bank lifted interest rates by 30bps to 2.1% last week, with rates now having been lifted by 1.5% since June. Concerns about the region returning to lockdown may well encourage the Hungarian central bank not to hike interest rates as market participants deem appropriate to address inflation risks, risking further HUF weakness.

The next psychologically important level eyed by the bulls for USD/HUF is at 330.00. If this breaks, then the pair could see a run towards record highs just above 340.00. The backdrop of a strong dollar amid strong US data and an increasingly hawkish Fed suggests that such a move might only be a matter of time.