Old Order Comes Back to East Europe as Zloty Regains Perch

  • Rabobank sees unwinding of bearish bets on Polish currency
  • Morgan Stanley sees gains as short-lived on new policy tilt

The old pecking order has returned in eastern Europe as Poland re-establishes its dominance over Hungary in the currency market.

The zloty halted a five-month slide against the forint, recovering more than half its losses since May in the past five days. The rebound has been fueled by speculation the Law & Justice party -- which won parliamentary elections on Oct. 25 -- will scale back some of its fiscal promises made during the campaign even as some analysts say Poland may resume cutting interest rates next year. At the same time, the forint has tumbled this week amid plans by the nation’s central bank to extend monetary easing, including the introduction of new policy tools.

“Some market players may be unwinding their bearish zloty bets against the forint,” Piotr Matys, a foreign-exchange strategist at Rabobank International in London, said by e-mail on Wednesday. “Dovish central bank comments in Hungary are fueling downside pressure on the forint, while the zloty is moving in the opposite direction amid a positive global environment.”

The Hungarian currency fell the most in emerging markets on Wednesday after policy makers unveiled plans for more monetary easing, saying they will expand the use of interest-rate swaps and deploy one or two other tools.

The central bank “isn’t concerned by stability risks posed by the forint” after the phasing out of households’ foreign-currency loans earlier this year and cuts in the foreign-currency share of government debt widened room for monetary policy, Vice President Marton Nagy said Wednesday.

The forint rose 0.2 percent to 313.94 per euro by 2:20 p.m. in Budapest, paring a 1.3 percent slump in the previous four days that took it to the weakest since September. Poland’s currency rose 0.1 percent to 4.2406 against the euro on the third day of gains, after slipping to a nine-month low last month. Many investors had avoided adding exposure to the zloty before the election of Law & Justice over incumbents.

While the new government has pledged to increase spending that risks widening the budget deficit and appoint central bank policy makers who favor resuming interest-rate cuts, that’s being offset in the currency market by speculation of more stimulus from the European Central Bank that will weaken the euro.

The zloty has outperformed the forint every year since 2008, according to data compiled by Bloomberg.

Morgan Stanley Unconvinced

Morgan Stanley strategists said the gains in the Polish currency will be short-lived and upheld a recommendation to sell zloty, arguing that changes to the central bank in the first quarter pose a threat.

“We think yesterday’s reversal was in part a position unwind with Polish political risks not being an immediate focus for the market, though we think this will change with upcoming changes” to the monetary policy committee, analysts led by James Lord said in a note to clients Wednesday.

Eight of the 10 members of Poland’s rate-setting panel will be replaced with new central bankers in January or February. The Law & Justice party is seeking candidates who support monetary easing to spur the economy growth.

There are still reasons to bet on zloty gains, with ECB President Mario Draghi reiterating on Tuesday that the institution will reconsider in December whether enough support is being provided to the region’s economy, a consumer of more than half of Central and Eastern Europe’s exports. Rabobank’s Matys forecast it will climb another 0.7 percent to 4.2094 per euro.

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