Złoty jumps as leu sinks

THE Polish złoty broke out of a two-week trading range this week, strengthening from 4.017zł to 3.9277zł to the euro – a level close to that seen in May during the explosion of the euro crisis.

The movement is the latest in a growing divergence among Eastern Europe’s most widely traded currencies. While, on the one hand, the złoty and Czech koruna have strengthened against the euro over the summer, the Romanian leu and Hungarian forint have sunk lower. This suggests that while risk appetite is still the governing factor in regional currency fluctuations, the market could eventually begin to price in more specific national factors.

Poland’s currency has benefited from higher-than-expected GDP growth figures for the second quarter – at 3.5 per cent versus an anticipated 3.2 – as well as the expectation of a rate rise. Analysts at Societe Generale suggest: “The fundamental environment is supportive, including the forthcoming tightening of monetary policy and the government’s commitment to reducing fiscal imbalances.” As a result, SocGen targets 3.90zł in the near-term.

The Czech koruna, meanwhile, remains stuck in its current range of 24.6-24.8Kc to the euro but, barring the resurgence of global economic instability, could be set to break out of this band to continue its strengthening against the euro. Traders should beware, however, of central bank intervention if this occurs, which, though unlikely to keep the koruna down in the long-term, could delay its rise.

Among the weaker southern currencies, the Hungarian forint has suffered from Budapest’s ongoing dispute with the International Monetary Fund (IMF) over its program of deficit reduction. Capital Economics’ Neil Shearing thinks that although most of the current bad news is priced in, the likelihood of more to come could push the forint lower: “I wouldn’t be surprised to see further spats with the IMF push the forint back towards 300,” he says.

Likewise the Romanian leu shows little sign of shifting upwards from its current 4.3-lei level against the euro. Shearing says: “There’s a combination of a fragile banking sector still dependent on IMF measures and austerity measures that will bring that under increased tension.”

Despite this north-south divergence, however, global economic trends still tend to rule the roost when it comes to minor currencies. This means that even with the best GDP growth on record and convincing deficit reduction plans, Eastern Europe’s currencies will find it difficult to attract buyers if the sovereign debt crisis erupts. The market’s counter-intuitive flight to “safe” havens still means that euro turmoil results in euro strength against almost any minor currency.