Polish Zloty's Haven Status Just a Memory as It Lags Every Peer

  • Decline in April was biggest among emerging-market currencies
  • Best forecaster UniCredit predicts more headwinds for zloty

Once a refuge for foreign-exchange traders to wait out emerging-market turmoil, Poland’s zloty is a haven no more. And its worst start to a year since 2009 may not be the end of the currency’s losses, according to its most-accurate forecaster.

While 21 of 24 developing-nation currencies tracked by Bloomberg advanced or were virtually unchanged against the dollar in April, the zloty tumbled 2.4 percent, the biggest slide in the group. Against the euro, it fell 3 percent, also the sharpest decline. That contributed to a 2.5 percent drop against Europe’s shared currency this year, as investors and analysts expressed concern Poland’s new government is undermining the rule of law.

“The Polish currency may underperform its peers for longer, even with the more positive backdrop in emerging markets,” said Kiran Kowshik, a London-based strategist at UniCredit SpA, which topped Bloomberg’s euro-zloty forecaster rankings in the first quarter. “The political woes have not gone away and could keep the zloty as a laggard in the EM currency rally.”

Most emerging-market currencies rose in April, along with the commodities their nations rely on for foreign earnings. That the zloty bucked the trend underscores the risks of seeking out havens in the developing world -- contributing to the surge in the more traditional refuge of the yen.

Deutsche Bank AG, the second-biggest foreign-exchange trader, called the zloty a “haven currency” as recently as February, following its speedy rebound from Poland’s downgrade by S&P Global Ratings, which cited political concerns.

The country’s woes are now spreading to the zloty, which sank to a more than two-month low of 4.4275 per euro on April 25. Forecasters have struggled to keep up with the pace of the declines, and the median estimate in a Bloomberg survey sees the currency strengthening to 4.31 by mid-year, from about 4.37 on Monday. UniCredit’s submission, made two weeks ago, was for a gain to 4.26.

Franklin Templeton cut its Polish holdings after the S&P downgrade. Currency traders are now bracing themselves for May 13, when Moody’s Investors Service is due to make its own assessment of the country’s creditworthiness. The zloty has a 51 percent chance of falling 5 percent this year, compared with 43 percent odds of a gain of that size, according to options data compiled by Bloomberg.

Official plans to boost spending and convert $36 billion in Swiss franc-denominated mortgages are contributing to the stand-off over the state of Poland’s democracy. Poland imports oil and gas, which is also hurting the zloty while its emerging-market peers rally.

Opposition ‘Hysteria’

While a weaker currency may make Poland’s exports more competitive, the declines stop being a benefit if they’re so rapid they become destabilizing and investors take fright. Prime Minister Beata Szydlo played down the zloty’s slump last week, saying the situation doesn’t “require our intervention yet.” She blamed opposition parties for fueling “hysteria” over government actions, including an overhaul of the Constitutional Tribunal that was criticized by European Union officials.

Investors are now focused on how Poland’s ruling party will deliver on its pledges to lower the retirement age, increase tax-free income and unwind Swiss franc home loans. The budget deficit will exceed 3 percent of economic output this year and there’s “further downside risks to budgetary performance in 2017,” Moody’s said in a report on April 13, before it gives its verdict on the sovereign’s credit.

Zloty has opened 0.3 percent weaker to euro, and remains the third weakest developing currency on May 2, driven down by a weak reading of Poland’s Purchasing Managers Index. The guage registered the second steepest one-month fall since the global financial crisis started in 2008 and missed all analysts’ estimates. Meanwhile, deflation deepened in April, as consumer prices index fell 1.1 percent, adding adding new pressures on policy makers to further reduce interest rates.

“The zloty will be under further pressure ahead of Moody’s, and the presentation of plans to help foreign-currency borrowers,” said Piotr Bartkiewicz, an economist at MBank SA in Warsaw. “Any verbal intervention from the government won’t change that. The Polish currency is shaky. We’re not a haven any more.”

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