Hot period on the zloty market. What makes him weak?

The zloty has been on the defensive for a long time. And deeper and deeper. The domestic currency market is getting hotter every day. Today, at some point in trading, the EUR / PLN exchange rate increased to 4.6673, testing the highest levels for 7 and a half months, and USD / PLN soared to 4.1094, which is a level that has not been viewed since May 2020.

EUR / PLN daily chart, D1. Source: Tickmill

USD / PLN daily chart, D1. Source: Tickmill

What is behind the current zloty weakening?

Why, despite the Monday's CEO Adam Glapiński's declaration that interest rates in Poland will continue to be raised, does the zloty lose value? 

There are several reasons behind the sell-off of the Polish currency this year. One of them is too low real interest rates in Poland and the much delayed reaction of the Monetary Policy Council to the rapidly growing inflation in Poland, the highest in 20 years. Interest rates should now be over 100 basis points higher so as not to create additional pressure on the zloty. 

The decisions of the Council are all the more delayed as the recent boom in inflation in the US, together with the good data on retail sales and industrial production released today, increases market expectations for future interest rate hikes by American Fed, which translates into a strengthening of the dollar, while harming all currencies of the emerging market countries. In this very zloty. In recent days, it is the strong dollar and the prospect of rate hikes in the US that mainly hurt the zloty.

Politics doesn't help ...

Polish politicians added their "five cents", which was no less surprising than the inflation shot. The growing and multifaceted conflict between Warsaw and Brussels carries a real threat of delay in inflow or even cutting off Poland from some European funds. And this creates a real risk of slowing down economic growth and depresses the zloty even more.   

Finally he messed up himself National Bank of Poland (NBP) and president Adam Glapiński. Investors, bearing in mind the intervention aimed at weakening the zloty at the end of 2020, fear that this year the NBP will again put the profit of the central bank above the stability of the zloty and lower inflation. And even if it does not intentionally weaken the domestic currency, it will be calm when it comes to its weakening at the end of the year. 

A few other factors behind the zloty depreciation can be added to this catalog, such as the deteriorating balance of payments, growing disproportions in the level of interest rates in the region, or the situation on the eastern border of Poland. 

It all leads to one conclusion. Until the end of 2021, and possibly also in early 2022, the zloty will remain weak. And even a large (100 bp) rate hike at the December MPC meeting will not change it. Although it is already the announcement of the entire cycle of interest rate increases in Poland, resolving the conflict with the European Union or changing the perception of the Fed's policy could do it. However, these are unlikely scenarios for the coming weeks.