Currencies Are on the Mend in Eastern Europe, With One Exception

  • Poland’s is only currency in region to be weaker since Brexit
  • Forecasters don’t predict zloty gains until late-2017

Olivier Blanchard: We Are Not in a Currency War

Brexit sparked a rout in the currencies of eastern Europe. Three weeks on, only Poland’s zloty has yet to heal.

Forecasters say there’s little prospect of a sustained rally in the currency for at least another year. The zloty may have recovered most of its 4 percent drop versus the euro in the immediate wake of the U.K.’s decision to leave the European Union, but it’s still down about 0.9 percent since the vote last month.

Poland’s currency is being hit harder, and for longer, than its peers because the nation is the biggest recipient of European Union funding, with Britain the third-largest contributor to the bloc’s 143 billion-euro ($159 billion) annual budget. It also faces trouble at home: the eight-month-old government has introduced the toughest bank levy in the EU and spooked investors with plans to convert foreign-currency mortgages into zloty.

“The zloty is one of the most vulnerable emerging-market currencies to the ongoing Brexit vote fallout and we see it continuing to under-perform,” said Lee Hardman, a London-based strategist at Bank of Tokyo-Mitsubishi UFJ. “Investors were already concerned by the direction of the government in Poland.”

Hardman sees the zloty falling to 4.45 per euro by year-end, from 4.4039 at 5:03 p.m. in Warsaw on Thursday. That’s in line with the median of 33 forecasts in a Bloomberg survey -- with all but four of the predictions made since the U.K.’s June 23 referendum. Strategists expect Poland’s currency to remain virtually unchanged through the middle of next year, before rallying to 4.25 by the end of 2017.

Options Bears

Options traders are also more bearish on the zloty than its eastern European counterparts for the next 12 months, with the premium on contracts to sell the currency versus the euro over those to buy at more than 2 percentage points.

“Markets will remain jittery for the Polish zloty,” said Wolfgang Ernst, an analyst at Raiffeisen Bank International AG in Vienna who expects the zloty to remain little changed for the next three months. “There’s a lot of politics in the exchange rate.”

The day after the U.K.’s vote, as the decision to leave the EU was announced, the zloty dropped to a 4 1/2-year low of 4.5391, suffering a bigger slide than its regional counterparts such as the Hungarian forint and the Czech koruna.

The forint erased its post-Brexit decline on Monday, following the koruna and Romanian leu, which edged higher last week. Further afield, the South African rand and an index of global stocks both erased their losses on Tuesday.

Law & Justice

Britain’s decision to leave turned markets on their heads worldwide and the zloty isn’t alone in retaining some of its momentum since the vote.

Even after gaining for three of the past four days, the pound is still 10.5 percent weaker versus the dollar since June 23, while gold -- which surged as investors sought the safest assets -- is up 5.8 percent.

And Poland’s main stock index is down 6 percent since the referendum, contributing to the $22 billion that’s been wiped off the nation’s equities since the Law & Justice party won power in October. Its policies led to the nation’s first-ever ratings downgrade, by S&P Global Ratings in January.

To some, these losses mean hope for the zloty later this year as investors look for bargains.

“The zloty will still remain the weakest link in emerging markets,” said Piotr Matys, a strategist at Rabobank International in London, who sees it climbing to about 4.35 per euro by year-end. “But there’s a chance it will make up some of its losses as Polish assets are attractive to opportunistic foreign investors looking for high-yielding bonds or oversold stocks.”

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