Political upheaval in Poland finally started to weigh on the country’s financial markets at the end of last week, and there was no sign of a rebound on Monday after nationwide protests extended over the weekend.
Protests against a controversial overhaul of the judiciary entered an eighth day on Sunday, after the country’s senate approved approved a bill that would force all Supreme Court judges to step down except for those kept on by the president.
The Polish zloty had been among the best-performing currencies in the world so far this year, rallying along with its central European peers as investors were attracted to the region’s high interest rates, growing economies and limited political risks.
However, the currency reversed course on Friday as the political situation escalated, with the US state department urging the government not to violate its constitution or international rules.
Friday was the zloty’s worst day against the euro since the day after the Brexit vote last year, falling 1.28 per cent. It clawed back only a fraction of those losses on Monday morning, rising 0.2 per cent by publication time.
The performance was even worse when compared with Poland’s neighbours, with the zloty suffering its worst day against the Hungarian forint since January 2016.
The forint had already been making some gains against the zloty in recent weeks as Hungary’s inflation rate accelerated ahead of Poland’s, but Friday’s sharp drop sent the zloty to its weakest level since March.
EU figures have threatened to take unprecedented action against Poland if president Andrzej Duda signs the judicial reforms into law. Commerzbank’s Tatha Ghose noted on Friday that the support of Hungary’s Viktor Orban means sanctions are unlikely to be applied, but said existing EU funds could be frozen and business confidence is likely to suffer.
To use market parlance, ‘visibility’ has suddenly declined sharply – the probability of extreme events has shot up, even if it is not clear which event it will be. This warrants a higher political risk premium on the zloty. The zloty is subject to intensifying downard momentum against the forint because of this, and we see further room to the downside.