Coronavirus punches the Polish currency. 5 PLN for the dollar, euro and franc? (Daily analysis 13.03.2020)

Two-digit drops on the markets and the dollar, which is again appreciating, have a negative impact on the zloty. Further weakening of the Polish currency is possible if the virus's impact on the economy proves significant. Will the euro, franc and dollar soon cost more than 5 PLN?

A strong increase in risk aversion leads to sharp declines in the financial markets. The main market indexes were losing more than 10% in both the USA and Europe. The depreciation has not even affected the precious metals - gold or silver.

The Bank announces a remediation program

On Thursday, the events of the day were a statement and a press conference of the European Central Bank (ECB) announcing a stimulus package for the financial system to limit the negative impact of the coronavirus.

The main reference rate remained at minus 0.5%, although there was speculation about a possible cut before the decision was published. The ECB lowered the conditions for the TLTRO III programme from June 2020 to June 2021 and added 120 billion EUR of asset purchases. The stimulus package goes beyond expectations, providing more liquidity in the market and reducing the restriction for banks. However, the direct response was not positive. On the one hand, the market is dominated by concerns about the impact of the coronavirus on economies and corporate performance. On the other hand, the ball is now on the fiscal policy court.

Three days ago, there was a positive signal of a coordinated fiscal and monetary policy in the UK. However, in 19 eurozone countries, this is much more difficult to achieve. It is precisely the fiscal policy in the event of a coronavirus pandemic that has the potential to have a much greater impact in limiting the negative effects of the pandemic and helping economies emerge from the downturn when the threat starts to ease. A step in the right direction seems to be the information that German Chancellor Angela Merkel is ready to abandon a balanced budget to fight the virus - something she suggested at a press conference a few days ago.

The world fears risk, the dollar is getting stronger

Central banks' activities do not make a great impression on the financial market these days. The strong risk aversion in recent days has been further exacerbated by the sharply appreciating dollar. The Bloomberg index of the US currency rose yesterday afternoon to around 1224 points, the highest level since November 2017. In turn, the main EUR/USD currency pair fell from just over 1.13 (yesterday before midday) to 1.11 during the press conference of the head of the ECB.

Increased risk aversion and a significant increase in demand for the dollar exerted a lot of pressure on the currencies of emerging countries, including the zloty. The USD/PLN exchange rate rose to nearly 3.97, EUR/PLN to above 4.39 - for the first time since September 2019, and the CHF/PLN exchange rate exceeded 4.16, reaching its highest level since January 2017. This may not, however, be the end of the fall in the Polish currency.

Will the zloty's weakness records break?

The peak of the coronavirus pandemic is probably still ahead of us, and hard macroeconomic data, which will start to flow in the following weeks and months, may further increase the pressure on the Polish currency.

Current market events slightly bring closer the scenario of exceeding the recent records of the zloty's weakness against the major currencies, i.e. about 4.93 PLN for the euro (February 2009, financial crisis), 4.28 PLN for the dollar (December 2016, Donald Trump's triumph in the elections) and almost 5 PLN for the franc (January 2015, the release the peg to the franc by SNB).

Given the current shock of both supply (disrupted supply chains) and demand (fear of the virus), it cannot be ruled out that in the coming months we will pay more than 5 PLN for the dollar, the euro and the franc. This may happen in the case of a negative scenario - a significant impact of coronavirus on the Polish and European economies (recession or technical recession this year).