The dollar gained 0.10 PLN in only two days and the euro cost 4.30 PLN during trade on May 1st. “Why has the Polish currency been the weakest in the past few days and is it related to the long weekend?” asks Marcin Lipka, Conotoxia Analyst.
When most Europeans were relaxing on labour day, currency speculation in London and New York remained active. British and US traders took advantage of the low liquidity in some currencies and caused strong depreciation. Notably dramatic drops in value were visible only in the Polish zloty. The Swedish and Czech currencies, as well as the South African rand, were severely affected.
Zloty the weakest of them all
Currency speculators were very clever in picking the right moment to play. For the last few days, emerging market sentiment has been weakening and in some countries, (e.g. Sweden) interest rate increases are less likely. In turn, the US Fed will probably accelerate the tightening of monetary policy, which usually means a return of capital invested outside to the United States.
The weakening of the currencies such as the South African rand or the zloty was, therefore, a relatively natural reaction to global events. On the other hand, the scale of it was unnatural. Compared to Friday's closing, the zloty lost 2.64% in relation to the dollar and was not only the weakest among the emerging countries' currencies but was also worse than the 150 currencies of the world except the Venezuelan Bolivar.
A long weekend not for speculators
The panic zloty depreciation during the first hours of May was not only a result of the capital outflow from emerging markets observed over the past several days but also caused by very low liquidity during that day’s trading. This was used by speculators to play against the Polish currency, try to activate stop-loss orders on the zloty and, thus, buy the zloty at a low rate.
A very similar strategy has been applied to the Swedish and Czech currencies, as well as to the South African rand. Trade was also limited in these countries (labour day) and there was a negative attitude towards them (in Sweden and the Czech Republic, interest rate increases are likely to be later than expected). All these currencies have lost more than 2% against the US dollar since Friday.
On the other hand, it is worth noting that the sell off did not have a global nature. A significant part of Asian and Latin American currencies remained stable and the changes on them did not exceed 1%, which confirms that the changes in the zloty or the Czech crown were caused by speculative actions, not fundamental, i.e. related to the condition of the economy.
What's next for the zloty?
The zloty's situation should improve and its exchange rate should stabilize in the coming days. Probably at the beginning of next week, the euro will be cheaper, and the speculative movement should end when most market participants return to work after the break in May. However, in the coming weeks, the perspectives of the zloty and other emerging countries' currencies may remain weak due to the accelerated pace of interest rate rises introduced by the US Federal Reserve.