Measured by the cost of Big Mac hamburgers at McDonald's restaurants, the zloty is undervalued by 44 percent, the most in 18 months and the second-biggest discount in Europe after the Russian ruble, according to The Economist's Big Mac Index. Poland's economy will grow five times faster than that of the euro region, the European Commission forecast on Nov. 10.
"The Polish economy will outperform others in the region, and the zloty shall reflect this," Juraj Kotian, an economist at Erste Bank Group AG in Vienna, said on Dec. 22.
The zloty dropped 14 percent against the dollar last year, less than only the Hungarian forint, Turkish lira and Belarusian ruble in Europe. The slump, combined with an 11 percent loss against the euro, caused foreign holders of local-currency bonds losses of 4.5 percent in euro terms and 7.5 percent in dollars in 2011, the third-worst in emerging markets after South Africa and Hungary, data compiled by the European Federation of Financial Analyst Societies and Bloomberg show.
This year, the Polish currency may rise 6.3 percent to 4.20 zloty per euro and reach 3.96 zloty a year later, according to a median forecast of economists compiled by Bloomberg. Against the dollar, the currency may gain 3.4 percent to 3.33 zloty before strengthening further to 3.19 zloty by the end of 2013.
Euro Connection
Investors have sold the currency because Poland relies on the euro region for 54 percent of its exports and 59 percent of its banking assets are owned by western European lenders, according to government data.
The zloty and Polish bonds have also become "proxy" for bets on a widening of euro area's crisis, according to Nomura International Plc. The zloty closed at 4.4663 against the euro on Dec. 30, the lowest finish to a year since 2003. The currency lost 0.1 percent to 4.4667 per euro at 5 p.m. in Warsaw.
Murat Toprak, the head of foreign exchange strategy for Europe, the Middle East and Africa at HSBC Holdings Plc in London, sees the zloty at 4.10 per euro by the end of this year.
"Given the movement that we have seen in the past two or three months, we think that the zloty has now significantly cheapened," Toprak said by telephone on Dec. 30. "We expect at least a stabilization of the eurozone issue, so it's going to at least remove some of the risk and support the zloty."
Zloty bonds gained 6.1 percent last year in local currency terms, according to the Bloomberg/EFFAS index.
Avoiding Risk
The extra yield on 10-year zloty bonds over German bunds in euros fell five basis points to 401 basis points, or 4.01 percentage points, data compiled by Bloomberg show. That's down from 443 on Sept. 22, the widest spread since 2002.
Concern over the euro region's debt crisis will keep weighing on demand for zloty bonds, said Jeremy Brewin, who helps manage $3.5 billion in emerging-market bonds as a fund manager at Aviva Investors Ltd. in London.
"The choice is still to avoid risk and I currently have very small foreign exchange risk in my portfolio," Brewin said in a phone interview on Dec. 22. "The zloty is a better value than at the beginning of the year. But is it really cheap?"
Poland's yield gap over U.S. Treasuries increased one basis point to 310 on Dec. 30 after reaching a three-year high of 352 on Nov. 23, indexes compiled by JPMorgan Chase & Co. show.
The cost to insure against non-payment on Polish debt for five years with credit default swaps fell to 281 on Dec. 30 from 282 a day earlier, according to data provider CMA, which is owned by CME Group Inc. and compiles private-market prices. The default swaps, which gain as perceptions of creditworthiness worsen, traded at 144 basis points a year ago.
Swap Discount
Polish swaps cost 69 basis points less than the average for countries in central and eastern Europe, the Middle East and Africa included in Markit iTraxx SovX CEEMEA Index. The discount was 66 basis points a year ago.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements.
The Big Mac index weights market exchange rates against those derived from comparing prices of McDonald's Corp. flagship hamburger, drawing from a hypothesis that exchange rates should reflect relative price levels.
A zloty appreciation would also help to keep inflation in check and allow Poland's central bank to lower borrowing costs to spur economic growth during the European crisis, said Martin Marinov, who helps manage about 630 million euros ($818 million) in emerging-market bonds at Raiffeisen Kapitalanlage in Vienna.
While Poland's central bank has kept the benchmark seven- day rate at a two-year high of 4.5 percent since July, the year- on-year inflation rate was at a six-month high of 4.8 percent November as the weak zloty boosted the prices of imported goods, data from the statistics office show.
The central bank's "hands are tied because of inflation," Marinov said by phone on Dec. 22. "If inflation is under control, that would help yields."
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