Daily analysis 21.10.2015

The zloty is under pressure of Sunday's elections. Positive and negative scenarios for the national currency based on the surveys conducted by the Bloomberg agency. The EUR/PLN at its highest level since January, and the level of 4.30 can be tested relatively quickly.

Most important macro data (CET – Central European Time). Estimations are based on Bloomberg information, unless marked otherwise.

• No macro data that could significantly impact on the analysed currency pairs.

Pre-election comments wear off the zloty

From the beginning of the month the zloty wore off to the euro by 0.6%. At the same time the forint gained approximately 0.8% to the European currency. This shows that the PLN wore off by approximately 1.5%, mainly due to the elections. The forint, as well as the zloty usually move in the same direction, and recently they are mainly influenced by the global sentiment.

Yesterday's wear off of the zloty, and today's entering of the EUR/PLN in the area of 4.27 (this is the highest level since January), were mainly caused by the comments from Henryk Kowalczyk. According to the information from the Polish Press Agency, the presentation of the deputy from PiS was to say that “the NBP would initiate a program – based on the EBC – that would generate 350 billion PLN within the next 6 years”.

This information went across the financial media quite quickly. Of course, the market is aware of the election campaign in Poland and many promises related to it. But the scale of the program and an attempt of influencing the monetary authorities may seem surprising, especially that the necessity of this operation is highly controversial at the present business cycle of our country. Additionally, a strong monetary stimulation in the eurozone and in other developed economies, is received completely different than in the emerging markets.

In her statement for the Bloomberg agency Roxana Hulea, the currency strategist in London's department of Societe Generale, underlined that independence of the NBP is endangered by such comments. However, Hulea also noticed that one should “be reserved” about such offers, because they might be only a “pre-election statements”.

Negative and positive scenarios for the zloty

Eleven out of fifteen economists surveyed by the Bloomberg agency expects that victory of PiS will cause a wear off on the zloty until the end of 2016. Rest of them claims that the national currency will not undergo any bigger changes within the following 14 months. On the other hand, if PiS is not able to gain the majority, 9 economists say that the PLN will not undergo any bigger changes, and the rest of them thinks that the national currency will enforce.

However, considering a general behaviour of the emerging markets' currencies in the moment of government changes, and the fact that the majority of promises is not fulfilled after winning the elections, the zloty would really depreciate after presentation of the results. However, if PiS creates a stable coalition in following weeks, and there are clear suggestions that there is no space for changes in this year's budget, the national currency should work off the losses. In a neutral environment, the EUR/PLN is very likely to return quickly to the range of 4.20-4.25.

In our opinion, a minority government or unstable coalition created by PiS or PO, is a much worse solution for the zloty. In order to create a stable government, PiS would have to co-operate either with Kukiz or PSL. On the other hand, PO in order to create the government would be forced to make an understanding with three parties – PSL, Zjednoczona Lewica, and Nowoczesna. This is the best solution for PO. In both mentioned cases this process could be long, and it is possible that it could end with another elections. This scenario could be a burden for the zloty for a long time. Especially if it is preceded with an unstable alliance within a minority government.

Political stabilisation is the best solution for the PLN

The political stabilisation would be the best solution for the zloty. This scenario assumes that the PLN would work off the loses faster, if the government is created by PO. However, it would need two allies at maximum – PSL and Nowoczesna.

A bonus for political risk on the zloty should also decrease, if PiS reigns on their own, or creates a coalition with PSL. However, this process will be much longer than in case of the first mentioned solution. It is due to the fact that the market will have to wait for the new government's budget plans. If the budget deficit does not cross the current plans, the matters related to a too strong easing of expenses will cease to have a negative impact on the PLN.

A matter of the new Monetary Policy Council still remains a question. However, if the statements of the new minister of finance or economy are moderate, and the new members are known from a reasonable approach towards the monetary policy, the PLN should work off most of the loses.

The least supportive scenario for the zloty, is the extension of the elections campaign for the following weeks. By this we mean a minority government and a danger of another elections. In this scenario the opinions could become more radical. This would be a sign for the wallet investors to sell, and also an invitation for the speculation capital to generate a bigger destabilisation of the national currency on a wave of political commotion. If this happens, keeping the EUR/PLN above 4.30 would be the base case scenario, and going above the limit of even 4.40 would not be excluded.

Anticipated levels of PLN according to the EUR/USD rate:

Anticipated GBP/PLN levels according to the GBP/USD rate: