Zloty index PLN Index lit yesterday’s all-time low. Yes, it is true, it is even lower than the bottom of the pandemic meltdown of March 2020.
You have to pay PLN 4.18 for USD and PLN 4.70 for EUR. For CHF – PLN 4.49, which beats the francs strongly. The USD / PLN exchange rate increased by 11% in 5 months, and the EUR / PLN by 4.2%. HAS NEVER BEEN SO WEAK IN HISTORY against other currencies. Why did this happen and what is the result of it and what’s next?
PLN Index quotation
See also: Gold valued in the Polish currency broke the price record from August 2020 and is gathering for a great bullish rally
The reasons for the unusual weakness of the zloty
There are several reasons for the extreme weakness of the Polish currency. It is obvious, because one would not be able to do such a “massacre”. Let’s list them:
High inflation in Poland and in the world. In the post-pandemic world, everything has gone up, mainly due to the disruption of supply chains and disruptions in the production of materials and the extraction of raw materials during the pandemic. Oil, coffee, steel, wood, wheat and corn, natural gas are more expensive, and this is followed by increases in shops and service outlets. Inflation in the US in October amounted to over 6% and was the highest since 1990. In Poland, inflation in October was 6.8% and was the highest since May 2001. Of course, high inflation means a decline in the value of money. This happens not only with the zloty – this is how you can console yourself.
Inflation rate in Poland
Source: Trading Economics
Delayed reaction of the MPC to the phenomenon of high inflation. There is no secret that most analysts and economists agree – the Monetary Policy Council overslept and started to raise interest rates in Poland too late due to rising inflation. The central banks of the Czech Republic and Hungary started their hike cycle already in summer, and the MPC did not arrange the first rate hike until early October, and the second one at the beginning of November. I wonder what will happen at the last meeting this year on December 8.
Strong US dollar. Another reason for the weakness of the zloty is the US dollar, which is growing in strength. Generally speaking, on the capital market, when the USD strengthens, it means that capital runs away from risky assets, that there is so-called risk off mode. In the foreign exchange market, emerging currencies are considered risky assets. Poland is still in the “basket” of emerging markets. The dollar appreciates due to the expectation of monetary tightening by the Fed due to high inflation.
Geopolitical tension on Poland’s eastern border with Belarus. I think we all know what is happening on the border with Belarus. There are scenes there that nobody dreamed of a dozen or so weeks ago. In addition, there is an increase in Russia’s military activity on the border with Ukraine. Investors’ imaginations started working …
Political tension between Poland and the EU. There is an ongoing dispute between Poland and Brussels over the rule of law, which may result in a delay in disbursement of funds from the National Reconstruction Fund. Of course, this dispute has not lasted for a month or two, but it is constantly weakening the Polish currency, as investors are concerned about the economic future of Poland.
Who benefits, who loses, what to do next
What’s next? Yesterday Prime Minister Mateusz Morawiecki tried to verbally strengthen the zloty. He stated: “We will do everything in communication and in our real actions to make the zloty a bit stronger”.
A few days ago, the NBP governor Adam Glapiński stated that the zloty weakening was mainly related to the strengthening of the dollar on the global market. He recalled that the zloty exchange rate was floating and “if changes, especially minor ones, are supported by market factors, it is hard to expect any reaction from the NBP”. So he suggested that no interventions were to be expected. “The marked increase in the number of COVID-19 cases in Europe and Poland may also have a negative impact on the zloty. It may mean the necessity to introduce restrictions, losses for the economy and additional budget expenses, ”he added.
The NBP president does not rule out further rate hikes. “If the incoming data confirm the current assessment of the situation, the likelihood of further interest rate adjustments is higher than they will be kept at the current level,” he said. In his opinion, the lack of a clear declaration about the rate hikes is not a reason for the zloty weakening. “Market participants expect an increase in NBP interest rates, and the rates expected by the market are much higher than the current ones. In a word: this factor should not be conducive to the weakening of the zloty, he added.
Weak zloty is good for exporters – producers of furniture, clothes, machines and devices, who sell them abroad as their competitiveness grows. Weak zloty is not good for consumers and for those who have foreign currency loans, e.g. in Swiss francs.
As far as the stock exchange is concerned, it would seem that companies that earn most of their revenues in the dollar should benefit from the strengthening USD / PLN exchange rate. These are mainly companies producing games and companies from the new technology sector, such as LiveChat. However, in the last few weeks they do not earn coconuts, they are simply stronger than the market, but not always. Example? The share price of the aforementioned LiveChat company – which generates the vast majority of its revenues in USD – increased by 6% in 3 months, while the mWIG40 index – in which this value has its place – went up by 7.5% …
A classic of the Polish capital market.
Companies that lose on the weakening Polish currency are ruthlessly punished, and those that benefit from it are prophylactically underappreciated.
– Paweł Biedrzycki (@PawelBiedrzycki) November 22, 2021