18/07/2016 06:07 AST
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% drop versus the euro in the immediate wake of the UK’s decision to leave the European Union, but it’s still down about 0.7% 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 €143bn ($159bn) 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 4.3981 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 UK’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 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 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 UK’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 last week, 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.
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 more than 11% weaker versus the dollar since June 23, while gold - which surged as investors sought the safest assets - is up 6%.
And Poland’s main stock index is down 6% since the referendum, contributing to the $22bn 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.”
Gulf Times
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