Zloty weakness to extend over S&P downgrade and negative market sentiment

S&P downgraded Poland's foreign credit rating by a notch to BBB+ with a negative outlook from A- with a positive outlook on Friday, Jan 15th. On the same day, Fitch affirmed its rating for Poland at A- with a stable outlook and Moody's did not change its A- (stable outlook) rating.

PLN which is already the worst performing currency in the EM space was further weakened. EUR/PLN moved sharply higher from 4.40 to 4.49 shortly after the downgrade and is currently trading at 4.4740. USD/PLN continued its way up reaching 4.1198 levels, the highest since March of 2003, with scope for further gains. Weakness in the Zolty is set to continue on global volatility and commodities rout.

"We could well see further downside as well as volatility for the zloty in the near term as market sentiment continues to be negative, but believe the currency will strengthen over time due to strong economic fundamentals, improving global risk sentiment and falling political risk premium," notes Danske Bank in a report.