PLN/HUF likely to face further downside risks over the coming months, says Commerzbank

The PLN/HUF cross came under pressure already in recent months as worries about inflation accelerating in Poland subsided. Pressure intensified following the publication of June CPI data, which showed Hungarian inflation accelerating, but not Polish inflation. Today, this cross is breaking lower for an entirely different reason though the judicial crisis in Poland. This crisis could have far reaching political ramifications because the EC could trigger Article 7 of the EU treaty.

Ex-PM and European Council chief, Donald Tusk, warns of marginalization of Poland within Europe, and is asking President Andrzej Duda to veto a Supreme Court reform bill which was passed by the lower house yesterday. This bill will likely be approved by the Senate today, without modification, after which it will be up to Duda whether or not it will be signed into law promptly. It is difficult to visualise Duda vetoing this or other outstanding judicial reform bills, which have been submitted recently by the PiS government.

Article 7 sanctions will probably not be applied, ultimately, because Hungary will almost surely veto them. But still, the triggering of article 7 would be symbolic. Even if more serious penalties are not applied, EU funds could be frozen until a compromise has been reached – this would have a sharp economic impact. Analysis suggests that GDP growth would be significantly slower in both Poland and Hungary, by as much as 1pp, if EU funding were not available.

"PLN/HUF is subject to intensifying downward momentum because of this, and we see further room to the downside. We can see the cross reaching 71.5 levels next year," Commerzbank commented in its latest research report.

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