A week after the Russian attack on Ukraine, the currency market remains extremely unstable. Market turbulence is at its strongest since the epicenter of the pandemic crash two years ago. The zloty will not be able to recover after the massive sell-off, despite the support from the National Bank of Poland and the Ministry of Finance.
Zloty: the euro is much more expensive, the franc and the dollar with a huge jump
On Friday morning, the euro breached to PLN 4.85 and was again the highest since 2009. The central bank had to help the zloty again, and it is activating for the third time since Tuesday, when the EUR / PLN quotes exceed the level of 4.80. The war in Ukraine will remain in the center of attention, which pushes the data on the US labor market in February (14:30) to a distant plan. The sell-off of the zloty and other risky currencies (the Czech koruna and the Hungarian forint are weakening similarly, the Swedish koruna is the weakest among the G-10s) accelerated after information about fierce fights around the largest nuclear power plant in Europe in Zaporizhia. Its firing led to a fire that caused panic on the financial markets. The National Atomic Energy Agency ensures that the radiation situation remains normal. This does not change the fact that investors have to get used to the fact that Russia’s attack on Ukraine poses a threat to the security of the entire Old Continent. Among the major currencies, the euro is strikingly weak. Investors still prefer the franc, dollar and even pound. The EUR / USD exchange rate drops towards 1.10, and the single currency rate in relation to the franc is heading towards parity. This translates into even stronger increases in the rates of the aforementioned three. The dollar exchange rate exceeded PLN 4.40 this morning and this week it rose by more than 7%. The last time the US currency cost more in 2001. The exchange rate of the franc increased by more than 8 percent since Russia’s attack on Ukraine, it violated PLN 4.80 and was the highest in history. The ongoing appreciation of the Swiss currency must cause concern to the country’s monetary authorities. In this case, intervention cannot be ruled out, which – unlike in the case of the zloty – would limit its strength.
Zloty: interventions only stabilize the euro exchange rate so far
The zloty is helped not only by the NBP, but also by the Ministry of Finance. The combination of ad hoc measures (sale of ad hoc currencies by the NBP) and long-term “structural” solutions (replacement of most of the government’s currency funds on the market, not at the central bank) should stabilize the zloty, and in the wider perspective favor its return to the upward path. Coordinated efforts show that authorities are not falling asleep pears in the ashes.
Not only do they have sufficient resources (reserves amount to around EUR 145bn, at the end of January the Ministry of Finance had almost EUR 6bn at their disposal), but they also show full determination to curb the sell-off of the zloty. And yet in such cases, credibility in the eyes of investors plays a key role. The Polish currency is protected against further deep sell-off. As fear and uncertainty in financial markets begin to fade, exchange rates should return to lower, more fundamentally consistent ceilings.
Zloty: forecasts of the euro exchange rate reflect weaker fundamentals
The zloty’s troubles, although very deep, should turn out to be temporary. At the moment, it cannot be reliably estimated, but the war unleashed by Russia and the resulting acceleration in inflation (oil has increased by more than a half since the beginning of the year, agricultural produce is becoming more expensive) will worsen the prospects for economic growth both in Poland and in our most important trading partners. A month ago, Cinkciarz.pl forecasts assumed that the GDP dynamics this year will amount to around 4.5%. and will slow down from 5.7 percent. Every year. At the moment, we are concerned that the result is more likely to be half the result than in 2021. The reaction of the NBP will be of key importance. We expect that next week the rates will be raised by another 50 basis points, to 3.25%, which will be favorable for our currency. Above all, the ceiling at which the cycle and the pace of hikes at subsequent meetings will end are questionable. Coming back to the zloty: investors in the coming months may include a higher geopolitical risk premium in the valuation of the region’s currencies. In other words: the fair value of the zloty will be lower than before the Russian attack and the EUR / PLN descent to 4.50 this year may seem an optimistic scenario at the moment.
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