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Heightened geopolitical sensitivity drives zloty moves

The latest bout of geopolitical uncertainty rocking markets in recent days has had a particularly severe impact on the Polish zloty, highlighting how it has become Europe’s most susceptible currency to geopolitics-led swings since the right-wing Law and Justice party (PiS) came to power.

The war of words between Donald Trump and Kim Jong Un spooked investors last week, dampening risk appetite and boosting haven assets.

Traditionally Hungary’s forint has been the most vulnerable currency in emerging Europe to such shifts in global sentiment, but last week it managed to eke out a 0.1 per cent climb against the euro, whereas the zloty dropped 1 per cent to its lowest level since March.

Easing tensions helped it pick up faster than its peers on Monday morning, rising as much as 0.19 per cent on a calmer day of trading that also saw Asian stocks recover and havens shed some of their recent gains.

The zloty has been under particular pressure in recent weeks after controversial plans to overhaul the country’s judiciary prompted mass protests and international condemnation. However, the latest moves also reflect a broader trend since PiS’ election victory in late 2015. A longer-term shift in measures of the currency’s volatility compared to its peers – as illustrated in the first chart above – suggests that PiS rule has had an impact on other aspects of its sensitivity to wider shifts in market confidence.

As analysts at ING noted today:

The US-North Korea geopolitical woes negatively affecting equity markets has been a clear negative for [the zloty] during the past days. Coupled with the EU-Poland political dispute overhang, [the zloty] is currently the most vulnerable CEE currency to changes in global risk sentiment.

In the period since PiS won Poland’s first post-communism parliamentary majority, the zloty’s 10-day historical volatility against the euro – which tracks the currency’s rate of change over the previous two weeks of trading – has been higher than the forint’s volatility more than three quarters of the time.

In the equivalent period prior to the election, in contrast, it was more volatile than the forint less than 30 per cent of the time.

As well as its curbs on the judiciary, PiS has cracked down on media independence and introduced economic policies including a subsidy for families that is expected to cost more than 1 per cent of GDP this year, prompting a ratings downgrade from S&P.

The zloty has still gained almost 3 per cent against the euro so far this year – and more than 15 per cent against the dollar – as investors are drawn to Poland’s relatively high interest rates and solid growth. However, the higher volatility suggests investors are less confident about sticking around when things get tough.