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Zloty Slumps to Two-Week Low on Hungary Contagion Concern

The zloty slumped to its weakest level against the euro in more than two weeks on risks of “contagion” as concern grew Hungary will fail to agree aid with the European Union and the International Monetary Fund.

The zloty slid 0.7 percent to 4.4963 per euro as of 3:48 p.m. in Warsaw, the lowest intra day level since Dec. 19. It’s the second-biggest depreciation among 25 emerging-market currencies tracked by Bloomberg after the Hungarian forint.

The EU and the IMF broke off aid talks with Hungary last month as the government prepared legislation that threatened to undermine the independence of the central bank. Parliament approved the laws on Dec. 30. The EU has no current plans to resume talks, European Commission spokesman Olivier Bailly said yesterday. Hungary is the EU’s most indebted eastern member.

“The worsening picture in Hungary may have some kind of contagion to Eastern Europe,” Olgay Buyukkayali and Peter Attard Montalto, analysts at Nomura Holdings Inc in London, wrote in a note to clients today. “Zloty’s liquidity and proxy hedge characteristic may result in unprecedented weakness over the next few weeks.”

Nomura recommended today investors sell the zloty in anticipation that it will weaken to 4.75 per euro, according to the e-mailed note.

Hungary received its second sovereign-credit downgrade to junk last month when Standard & Poor’s followed Moody’s Investors Service in taking the country out of the investment-grade category on Dec. 21.

Zloty assets may be “negatively affected by the ongoing debacle in Hungary,” Guillaume Salomon, a strategist at Societe Generale SA, wrote in a note to clients today.

The French bank is advising clients to pay the fixed rate in interest rate swap transactions as the market is “too optimistic” predicting a decline in borrowing costs this year, according to Salomon. The two-year swaps, which are used to bet on future interest rate changes, may rise to 5.04 percent, he wrote. Swaps increased seven basis points to 4.8 percent today.

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