At the start of the new quarter, the spectre of a global recession is becoming deeply apparent to investors. The risk of this is particularly acute on the Old Continent, where the dangers of an energy crisis are being forcefully recalled as gas prices rise. The euro is above 4.75 PLN, the franc is approaching 4.80 PLN, and the dollar is above 4.60 PLN. This balance of power means that it is not only the zloty plunging but also the value of the single currency. In June, the euro equalled the franc, and now there is a growing risk that the situation will repeat itself in relation to the dollar. On Tuesday, the EUR/USD exchange rate collapsed to its lowest levels in twenty years and may have an open path to parity.
In recent weeks, after the euro exchange rate has made up for all the dynamic growth recorded after the outbreak of the war, the Polish currency has again found itself in trouble. Fear of recession is causing a tsunami on the financial markets. It results, among other things, in sharp discounts on European stock markets. Apart from this, the prices of many raw materials have plummeted, with the price of a barrel of crude oil on the London Stock Exchange falling by almost 10% on Tuesday alone. The market turbulence and uncertainty push the EUR/PLN exchange rate above 4.75. This means that the euro has risen by almost 0.20 PLN in a month and is now the most expensive since the end of March. Fear of a recession in Europe is pushing investors away from the zloty, but it also signals trouble for the single currency. The euro is at its weakest against the dollar in twenty years. It is not only higher interest rates that are behind the dollar (the ECB is still ahead of its first hike, and the Fed has already raised rates by 1.5 percentage points). Independence from oil and gas imports translating into much more favourable terms of foreign trade is also essential in times of energy crisis.
The peaking value of the euro, which is in real danger of equalling the value of the dollar, is resulting in an even sharper rise in the USD/PLN. The dollar in the current environment is the first choice and costs more than 4.60 PLN, which is even more than after Russia's attack on Ukraine. The franc is trading close to 4.80 PLN, which also reflects how deep the euro is on the defensive. The extreme volatility of the markets and the minor mood of investors make capital turn away from the zloty and other currencies of the basket of emerging markets, regardless of their attractiveness based on fundamental valuations. In a broader horizon, the zloty should be slightly stronger (Conotoxia forecasts assume that at the end of September we will pay around 4.60 PLN for the euro), but as long as a tsunami is raging through the markets, it is difficult to expect such an assessment to translate into investors' behaviour.
The situation of the PLN is also sensitive as the zloty faces another important test in the form of tomorrow's MPC meeting. Fear of recession, weakening consumption, and a turnaround in commodity prices reduce the risk that inflation will become fixed at a very high level. This means that double-digit interest rates will not be needed to bring prices under control, and the view may prevail that a smaller-scale hike than in the previous two months will suffice (rates were lifted by 75 basis points in June and May). There is a risk that too soft a move or the announcement of the end of the cycle will exacerbate the weakening of the zloty, something the authorities would undoubtedly like to avoid. After all, this year, a clear preference has been expressed for falling exchange rates to help fight inflation by driving down the price of imported goods with a particular focus on raw materials.
Looking a little more broadly, it could be said that exchange rates this week did not wait for key data and decisions. After the dollar's rally and the euro's sell-off, news from the US on services sentiment, the minutes of the June Fed meeting (releases today) and Friday's labour market report could change things by 180 degrees. After all, there is only one step from fear of a global recession to a narrative in which economic jitters mean less need for the US tightening and even rate cuts in 2023. And this could drive a correction of the recent sharp reshuffle in currency and equity markets and translate into an extension of the rebound in previously heavily discounted bonds.