BofA sees potential HUF rise with European gas price drop

Bank of America (BofA) analysts suggested that the Hungarian forint (HUF) could appreciate significantly against the euro (EUR) if European gas prices were to halve. This potential scenario is predicated on the development of a ceasefire in the ongoing conflict in Ukraine and the establishment of a gas agreement between Europe and Russia.

According to BofA, such a drop in gas prices could lead to a 3.75-7% appreciation of the HUF against the EUR. The analysts also anticipate that the EUR would strengthen by approximately 5% against the US dollar in this scenario, while emerging market (EM) currencies could see an average appreciation of around 4.5% against the dollar. They note that these results are sensitive to the methodology used and assume that no new tariffs would be imposed.

BofA's analysts believe that the actual appreciation of the forint is more likely to be on the higher end of their estimates, citing that the positive impacts of a ceasefire would be specific to Europe, suggesting that the EUR/USD exchange rate is a better measure to capture this sentiment than the broader EM FX index.

They acknowledge that global emerging markets could also benefit from improved sentiment and potentially lower oil prices, but they expect these effects to be less significant than the positive impacts on Europe.

The analysis by BofA indicates that the primary factors influencing the EUR/HUF exchange rate would be a stronger EUR against the USD or stronger EM currencies against the dollar, rather than the direct impact of falling gas prices.

Although the direct impact on Hungary would be relatively small (but still greater than in Poland), the beta coefficient from their logarithmic regression shows that the exchange rate is much more sensitive to changes in the EM FX index and EUR/USD than to European TTF gas prices.

BofA estimated two separate regressions for the EUR/HUF exchange rate, both of which used dynamic ordinary least squares (DOLS) regression with a monthly average frequency from January 2015 until January 2025.

The first regression included TTF gas prices (1-month forward) and the EM FX index as explanatory variables, while the second regression used the EUR/USD exchange rate instead of the EM FX index. In both regressions, the variables are co-integrated, meaning they have a long-term equilibrium relationship.

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