"Despite the Polish economy being in a very good condition, the zloty's high valuation is mainly influenced by external factors. And these may soon cause the situation to reverse," writes Bartosz Grejner, Conotoxia Analyst.
The dollar dropped below 3.40 PLN and was the cheapest since December 2014, the euro cost 4.14 PLN (the least since mid-2015) and the franc fell to the 3.52 PLN level, the lowest level since January 2015. The last few days were characterized by some good information about the zloty's strength and data from Poland. Although the Polish situation has improved significantly, which could support the zloty (in theory), the currency's condition did not only depend on it.
Appetite for higher increases
In the largest European economy, the situation has also greatly improved. The better condition in Europe and political stability increased investor interest causing more capital inflows into the region. 15 billion USD in 2017 was sent from USA bond funds to developed European countries, the most in four years (EPFR data).
In turn, bond markets of the emerging countries has received 70 billion USD in the past year, the most in 13 years, and at least 75% more than in the previous years. Therefore, it naturally increased the demand for the zloty (a currency characterised by a slightly higher risk and a higher return rate for investors).
Dollar weakening was another factor that helped the emerging markets, including the zloty. Over the last year, euro valuation increased in relation to the dollar by about 16% (the zloty gained around 17%). The dollar's fall caused some capital outflow from the USA, which has flowed to emerging countries, at the same time significantly strengthening the zloty.
USA will support the dollar
The end to dollar weakness may be close. Three interest rate hikes are expected in the USA this year, which should support the US currency. Moreover, tax cuts (that entered into force at the beginning of this year) are likely to result in faster price increases due to increased consumption and investment, which may cause the fourth interest rate increase.
Therefore, the forecasts of the US companies profit have risen significantly, which has already helped to reach record-breaking results of major stock exchange indexes in the US. Only in January, the index of the largest 30 companies gained nearly 6%.
ECB will weaken the euro?
The last sharp dollar decline triggered significant increases in the euro. This has caused concern for members of the European Central Bank about the detachment of the euro valuation from the foundations. A strong euro can be an obstacle for price growth to increase in the eurozone, which has been the goal of the ECB over the past few years, but which is still being cooled down.
On Thursday (next week), the two-day ECB meeting will end. Given the member's concerns, it is likely that the statement from the ECB will significantly weaken the euro because the strong position of it under the current circumstances is not in favour of the ECB. However, the weak single area currency may strengthen the dollar, which will probably result in a negative effect on the zloty.
Interest rate in Poland will not be changed
The strengthening dollar and the slowed down inflows of capital into the emerging countries is a scenario in which the zloty will incur losses and move away from current levels. Help will also not come from Poland. The Polish Monetary Policy Council is not willing to raise interest rates before the end of this year. At a recent press conference, its President, Adam Glapiński, even implied that they may not be raised at the beginning of 2019 either. The lack of support from both internal and external factors may increase the chances for the zloty to weaken in the near future.