The US currency lost 13% during the last five months and nearly a half of this drop happened during the last month. Should such a drop rate continue, the dollar could cost 3 PLN by the end of August. Is this a viable scenario? – answers Bartosz Grejner, Cinkciarz.pl Analyst.
To answer this question, one needs to analyse the reasons behind the recent dollar’s slump, not only against zloty but also globally. There were several factors that negatively contributed to the dollar’s decrease in value in a relatively short amount of time.
Firstly, the market could have been a little disappointed by the apparent lack of progress in the implementation of promises made during the election by the new president of the US, including changes to taxes. Secondly, the consumer prices grew by less than expected in the US. This sparked speculation that the rising inflation path is uncertain which could translate into a slower pace of interest rate increases. Thirdly, political aspects influenced the value of the dollar as well, worsening the market sentiment. The recent FOMC minutes didn’t help either – the proposed rate of reducing the Federal Reserve’s balance sheet, which was slower than anticipated, causing the dollar to visibly weaken.
There was anxiety on the market that the problems of the new White House administration could hamper introducing the changes to the tax system, border tax adjustment or increasing infrastructure spending. A flatter and spanning over a longer period of time fiscal stimulus could mean a lower inflation pressure which, in turn, translates into a lower probability of faster interest rate increases in the US.
A potentially lower level of interest rates (or slower pace of their hikes) could weaken a currency. The dollar lost all the gains in relation to the euro earned since the November elections to the White House and Congress.
Europe and Poland in a better situation
The Polish currency, in contrast to the dollar, was strengthened by a better sentiment on the European market, especially in the eurozone. Indexes of manufacturing and services activity, consumer and business sentiment have been in an upward trend recently. Emmanuel Macron’s win in the French presidential election removed an uncertainty regarding the future of the eurozone and the European Union. That resulted in a higher demand for European assets, especially those of emerging markets which also increased the demand for zloty, greatly contributing to its appreciation.
Macroeconomic data regarding Poland supported zloty as well. After a weak October, retail sales and industrial production grew substantially between November and March. This, among others, contributed to a GDP growth rate of 4% year-over-year in the first quarter, which exceeded market expectations.
Adam Glapiński, the chief of Polish National Bank and chairman of the Monetary Policy Committee, even stated during a recent press conference that the Polish economy could expand by 4% not only during the first three months but in the course of the whole year as well.
Is this high GDP growth rate sustainable?
The scenario with a 4% growth in Poland’s GDP in the whole 2017 doesn’t necessarily need to be fulfilled, which could also limit zloty’s gains. The last quarter saw an increased growth of the economy mainly due to higher consumption spending spurred by the government’s children aid program “Family 500 plus”.
The positive contribution from this program to the GDP growth rate could die out in the second half of 2017, as the reference will be the last quarters of 2016 which already benefited from this effect. Hence, maintaining such a growth rate (4%) could prove an impossible task, taking into account that the aforementioned children aid program won’t be expanding.
Additionally, the data from the Central Statistical Office for the first quarter point to private (corporate) investments still not having been increasing. The index decreased in the first three months by 0.4% when comparing to the similar period in the previous year. It’s worth noting that it was also negative during the whole 2016.
Moreover, the Polish National Bank’s data regarding the current account gave hints as to the future level of investments. They showed that there has been virtually no inflow of fund from the EU. If they still won’t be flowing in the next months, the economy could expand, albeit at a slower than expected pace. As a result, zloty’s value could be negatively impacted.
Although zloty has been supported by the positive sentiment from the eurozone, the same region could become a problem by the end of the year for the Polish currency. The European Central Bank (ECB) has been maintaining a very accommodative monetary policy, conducting a monthly assets purchase program (60 billion euro a month) and maintaining a negative deposit rate. According to its concept, the assets purchase program will be kept by the end of the year and it has been widely anticipated that the ECB will start communicating the end of the program in the second half of 2017. Should this happen and the eurozone will see a sustained inflation growth, the ECB could also increase the interest rate levels at the end of 2018.
Such a move would be in contrast to the Polish Monetary Policy Committee stance whose chairman suggested leavening interest rates (1.5%) unchanged not only in 2017 but in 2017 as well. A tightening of the monetary policy by the ECB, while in Poland there are no changes, could cause the capital, which so helped the zloty, to flow out of Poland, contributing to its weakening not only against the euro but also in general.
Will the dollar cost 3 PLN already in August? It will be rather 4 PLN
The scale of the dollar’s slump against zloty in the recent month could suggest that, if continued, the US currency value could slip to 3 PLN. Such a price was seen three years ago for the last time. Will it be back in three months’ time?
It’s certainly possible, however, improbable. The dollar would have to further weaken in general. Meanwhile, the base scenario still assumes two additional interest rate hikes in the US which could support the dollar in the months to come. On the other hand, zloty has had all the positive effects already priced in, so a price correction will be more possible than further appreciation. In the next few months, the dollar’s value against the zloty could stabilise between 3.7 and 4 PLN.