Currencies: is it really a disaster for the zloty?

In fact, little has changed since yesterday. If anything, we’ve heard from the president that a December rate hike is a possibility, which is in line with market expectations. The weakness of the zloty since only yesterday (or the past few days) can be explained simply in theory – the broken barrier on the EURUSD currency pair and a very significant strengthening of the dollar against the euro as a result of this breakout. Historically, usually when we see the weakening of the euro against the dollar, the zloty loses more against the US currency, and this is what happened in the past days.

Why does the dollar earn? The US interest rate market is speculating that the Fed will have to raise rates faster, and because such a topic in the Eurozone is almost completely non-existent (the market tried to do such speculation, but was “cut” by the European Central Bank) the dollar rises against euro.

However, not everything “makes sense” here. In Poland, the market expects a rapid rise in interest rates to about 3%, and this should help the zloty. The truth is that, usually in terms of currency (especially in the short run), global factors dominate local ones, but not everything seems to be true here either. Speculation about a faster rate hike in the US should cause worse sentiment in the markets, which it is not. Despite more than 6% inflation in the US, stock indices are at record levels, which should also support the zloty, and, as we can see, this is not happening.

There is also a political and geopolitical thread. They point to the NBP connection and tension on the border with Belarus. In the first issue, in my opinion, the market is more important than business, and here we started the process of rapid increases.

On the other hand, geopolitics tends to have a very short-lived effect, and I don’t think it matters now. However, the fact is that such a magnitude of zloty weakness may seem confusing and this causes attempts to search for different explanations. What’s worrying is that a potential “shift” in Fed policy (and its consequences for broad markets) has yet to actually happen, and its emergence could pose a significant threat to the zloty.

A lot could happen today in the FX market because we have the most important data from the US this week (14:30 retail sales, 15:15 production), and the Fed’s speech marathon (today’s Barkin, Daly, Postich and Harker). On Tuesday at 9.30 the price of the euro is 4.6540 zloty, the dollar is 4.0921 zloty, the franc is 4.4023 zloty, and the pound is 5.5092 zloty.

Przemyslav Koece CFA
Chief Economist XTB