A bumpy week for the zloty. Is it just turbulence?

Last week was quite bumpy for the zloty. At one point, the dollar cost even more than PLN 4,12. However, the situation has calmed down - was it just a one-off change?

Important global sentiment

There's a lot going on in the market. We have geopolitical tensions in the Middle East, the receding prospect of interest rate cuts in the US, a rather tense start to the quarterly earnings season in the US. This creates quite an interesting context for the zloty market, which is also influenced by local factors.

What do we already know? It is becoming increasingly clear that dear Fed i EBC they diverge. In recent years, one could have the impression that the ECB was even copying the Fed, but this strategy will no longer work and Frankfurt will have to decide on the first rate cut themselves. In Europe, the disinflation process is faster a the risk of recession is greater, therefore the central bank cannot wait until the Fed decides to cut rates. This change is unfavorable for the euro against the dollar, and the zloty usually performed well when EUR/USD was rising. Therefore, this is a risk factor, although it is not certain that in this situation the zloty must lose.

Global sentiment is also very important, and although there has been a significant cooling, the question is whether it will be permanent. An important week of the quarterly earnings season on Wall Street is ahead of us. If the stock market giants once again show good reports, the sentiment may quickly recover, and in such a situation the zloty may remain strong against the euro.

Will the Monetary Policy Council consider cutting interest rates?

There are also national factors - funds from the KPO and ours interest rates. The jump in PLN rates last week was related to the information that KPO funds will not be exchanged on the market, but directly used in euro contracts. Since, after the change of the parliamentary majority last year, hopes for inflows of funds from the KPO were an important factor for the zloty, this information caused an understandable allergic reaction. Plus it turns out that energy price increases from July will be smaller than expected, and this means a lower inflation path. Will this encourage the Monetary Policy Council to consider cutting rates? The divergence in monetary policy between the US and the euro zone could be less dangerous for the zloty if the Council maintained relatively high rates. Discounts may eliminate this argument.

To sum up, it seems that the circumstances are no longer favorable for the zloty, and in my opinion it is now slightly overvalued. Much will depend on the mood on Wall Street (in the short term) and whether the Council will consider rate cuts. At 9:10 a.m. on Monday, the euro costs PLN 4,31, the dollar PLN 4,05, the franc PLN 4,44, and the pound PLN 5,01.

Source: Dr. Przemysław Kwiecień CFA, XTB