Swiss franc and Greek risk may hit Polish zloty

Significance

While the Swiss franc has since retracted most of its unprecedented gains, Central European (CE) currencies -- peculiarly exposed to fallout from the SNB's decision by the high share of franc-denominated mortgages in the region -- have come under significant strain. This comes at a time when they were already weakening sharply because of the resurgence of the dollar and fears about the Greek elections. The Polish zloty is the most exposed to a strengthening franc given the lack of any protection against currency risk; in Hungary, FX-denominated mortgages are being forcibly converted into forint-based contracts.

Impacts

• Poland is most at risk from a stronger Swiss franc because of the country's large stock of franc-denominated mortgage contracts.
• Hungary will be better protected against sharp swings in its currency's exchange rate against the Swiss franc.
• The key risk to CE assets is investors losing confidence in the ECB because of the perceived lack of credibility of a sovereign QE scheme.
• Mainly German opposition to QE could result in a sharp deterioration in sentiment towards the euro-area.