Brexit Woes Pummel Zloty for Fourth Day After 5-per-Euro Warning

  • Yield premium on Polish bonds highest since 2012 as CDS rise
  • Zloty among most vulnerable to British departure from EU: ING

Poland’s zloty weakened for a fourth day as speculation grew Britain will leave the European Union, boosting concern the move will hurt the bloc’s biggest eastern economy.

The currency slid 0.4 percent on Tuesday to a three-week low of 4.4278 per euro, adding to a 0.8 percent slump yesterday after central banker Jerzy Kropiwnicki signaled on Monday that after a vote for Brexit he would tolerate a slump to a record 5 per euro before intervening. The yield premium on the nation’s 10-year domestic bonds over equivalent German debt jumped to the most since 2012.

“We identify the zloty as one of the most vulnerable currencies to Brexit risks,” Chris Turner and Petr Krpata, strategists at ING Groep NV in London, wrote in a report to clients. “In such an environment, yesterday’s comments from the MPC board member Kropiwnicki are not helpful.”

Brexit concerns are hurting the zloty, which plummeted to a record intraday low of 4.93 per euro in February 2009 during the global financial crisis, because the Polish economy is the largest recipient of EU subsidies and Britain is the third biggest net contributor to the bloc’s budget. The pound and European stocks extended losses on Tuesday after a series of new opinion polls showed the U.K. may vote to leave.

A potential secession from the EU could also threaten Britain’s “relatively close” economic ties with Poland, including trade and money sent home by Poles working in the U.K., according to Rabobank strategist Piotr Matys in London. A vote for Brexit could weaken the zloty to “an initial target” of 4.599 per euro, he said in a research note on Tuesday.

The Polish currency’s 2.5 percent slump against the euro in four days is the biggest in eastern Europe and compares with a 1.3 percent retreat for the Hungarian forint and a 0.4 percent drop for Romania’s leu.

Polish financial assets have underperformed since Prime Minister Beata Szydlo’s Law & Justice party rose to power last year, pledging to tax financial institutions and return the nation to its Roman Catholic roots. Efforts to step up control of the country’s constitutional court have sparked criticism from the EU and contributed to Poland’s first-ever credit-rating downgrade in January.

“Controversial measures implemented by the governing Law & Justice party to consolidate its power since winning the general election in October left the zloty far more exposed to negative global sentiment,” Matys wrote.

‘Panic Selloff’

Kropiwnicki said there is no need for the Polish central bank to intervene unless the zloty weakens to 5 per euro following a possible vote for Brexit. He added a weaker zloty would boost Polish exporters.

The Polish currency’s two-week implied volatility against the euro, which shows investor bets on the magnitude of future exchange-rate swings, rose to a four-year-high of 13 percent on Tuesday from 7.3 percent a week earlier. The cost of insuring the nation’s debt with credit-default swaps has risen 12 basis points this week to 90 basis points, the highest in three months.

“The markets are on the verge of a full-blown panic selloff due to rising probability of Brexit,” said Matys. “Kropiwnicki essentially gave speculators a green light to bet against the Polish zloty should Brexit materialize.”

Before it's here, it's on the Bloomberg Terminal.