Fundamental Analysis: More Losses for the Zloty

The Polish zloty has continued to move down today against many major currencies. Weaker sentiment and outlook for growth in the EU generally are some of the main drivers. For USDPLN specifically, though, the lower expectations of a rate cut tonight by the Fed have supported the dollar.

USDPLN moved up very slightly today to trade at 3.804zł. The euro and the pound made bigger gains, though, to 4.263zł and 4.792zł respectively.

Trade wars’ impact on PLN continues

On the whole, the fundamental outlook for the zloty, like many emerging currencies, remains towards the downside. There’s still no firm signs of resolution in the Sino-American trade war, which is a significant negative for an export-driven currency like PLN.

The European Central Bank’s President Mario Draghi was noticeably more dovish in his speech yesterday. In his comments at the ECB’s forum in Portugal, Dr Draghi stressed the ECB’s capacity and willingness to act in the event of another recession. Instruments in policy could include cutting rates into negative territory.

These remarks come in the context of overall very weak sentiment in the EU recently. ZEW economic sentiment from Germany declined dramatically to negative 21.1 yesterday. This and other releases suggest ongoing weak growth in Poland’s main trade partners.

Such events are important for the zloty in most of its pairs because exports contribute about 25% of Poland’s GDP. Cars and car parts, the country’s top exports, almost all go to the EU’s major economies, primarily Germany, the UK, and France.

Another effect of trade wars besides growth is generally weaker sentiment in emerging markets. Many emerging currencies around the world have suffered from weaker outlooks for growth and tightening conditions in international trade.

Decent data from Poland and gains for shares

Looking at Poland itself, though, data has been quite good recently. Monday’s key release of annual core inflation printed 1.7%. This is the highest figure in over eight years for two months in a row. Employment growth at 2.7% this morning was 0.2% lower than April’s figure but still in line with the forecast.

The WIG (Warszawski Indeks Giełdowy; ‘Warsaw Stock Exchange Index’) has made a big gain in today’s session so far. Poland’s main index of shares has moved up over 1000 points to 59,936 at the time of writing. Despite the lack of any strong correlation between shares and the zloty, Poland’s currency could find support in an ongoing upward movement by the WIG.

Focus on the Fed tonight

The most important event in currency markets this week is tonight’s rate decision by the USA’s Federal Open Market Committee at 18.00 GMT. The consensus indicates no change to the funds rate of 2.25-2.5%. However, most analysts and media sources expect at least some hint of a rate cut later in 2019.

If markets do perceive such an intention tonight, emerging currencies including the zloty would probably receive a boost. Although the National Bank of Poland cut its reference rate in March, a move down by the Fed would reduce to differential for USDPLN to a relatively low 0.5-0.75%. On the other hand, hints by the Fed that investors have simply been excessively positive on the timing of hikes could lead to more gains for USDPLN.

Beyond the Fed, there are two significant releases from Poland at 08.00 GMT on Friday:

• Annual industrial production (May): previous 9.2%, consensus 7.2%
• Annual PPI (May): previous 2.6%, consensus 2.1%

If the forecasts are correct here, the zloty might face some downward pressure at the end of the week.

Last but by no means least, the Bank of England’s Monetary Policy Committee is meeting to announce its bank rate and quantitative easing tomorrow at 11.00 GMT. A change to either is very unlikely, but comments by Governor Mark Carney in the subsequent press conference will almost certainly cause high volatility for GBPPLN.

Zloty set to move sideways until the Fed

PLN’s most favorable direction is sideways in the runup to tonight’s key news. Traders will study comments from the Fed carefully because these will probably dominate news in currency markets for the rest of the week. That said, traders should also monitor the technical picture, particularly for conditions of saturation.

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