The zloty clawed back some losses after its biggest two-day slump in a year as speculation the U.S. Federal Reserve may trim stimulus set off a “tectonic shift” in emerging markets, according to Societe Generale SA.
The Polish currency gained less than 0.1 percent to 4.2813 against the euro at 2:41 p.m. in Warsaw, after it fell 2.2 percent in the last two days, the worst streak since May 2012. The zloty plunged to a 11-month low yesterday and its 2.8 percent depreciation in May is the largest monthly loss among Europe’s emerging currencies tracked by Bloomberg.
Chairman Ben S. Bernanke said on May 22 the Fed “could take a step down” in its pace of purchases of Treasury and mortgage debt in the next few meetings if it saw sustained improvement in the U.S. economy, reducing the quantitative easing stimulus which has rallied emerging-market assets in past months. Further curbing the zloty’s allure, Poland’s central bank will cut interest rates to a record low 2.75 percent on June 5, according to the median estimate of 13 economists surveyed by Bloomberg.
“A tectonic shift is happening in emerging markets” because of the “uncertainty as to the timing of QE tampering,” Guillaume Salomon, Societe Generale’s London-based chief emerging market strategist, said in a research note today. Investors should buy the euro for the zloty with a target of 4.44 as the “ongoing dovish tone” of Poland’s central bank will pressure the currency, he said.
The zloty is also hit by Poland’s slowing economy, set to expand at the weakest pace since 2002 this year, according to the Finance Ministry’s 1.5 percent growth forecast, Nomura International Plc said in a research note on May 30.
“Markets are worried by the fiscal situation and low growth,” Nomura economist Peter Attard Montalto said. Still, “it’s too much to read across anything like ‘weak PLN=bond bubble bursting.’ We still fundamentally believe Poland is a strong and sound credit,” he said.
Poland’s government officials or central bankers may “intervene verbally” and state-owned Bank Gospodarstwa Krajowego may enter the currency market to stop the zloty from further weakening, Montalto said.
The yields on the Polish government’s five-year bonds rose seven basis points to 3.08 percent, increasing for the fifth day to the highest since April 16. Zloty-denominated government bonds maturing in one year or longer have lost 3.5 percent in May in euro terms, the fourth-worst showing among the 26 sovereign indexes compiled by Bloomberg and the European Federation of Financial Analyst Societies. Only debt from South Africa, New Zealand and Australia performed worse last month.
Foreign investors have in in the past two days reduced their positions in local-currency bonds because of concerns over foreign-exchange losses, according to a note by Bank Pekao SA economists, led by Marcin Mrowiec.