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Daily analysis 31.12.2013

31 Dec 2013 12:07|Marcin Lipka

A review of few currency pairs related with Polish zloty. What elements have shaped their evaluation in last months, what will be crucial in their behavior in next weeks and what are the chances of continuing the present trends in following quarters.

General situation on zloty

National currency was relatively strong in previous months. Extending mild monetary policy of central banks (most of all Fed), obvious improvement of the situation on current turnovers calculation (mainly balancing the trade exchange) and acceleration of economic growth in 3rd and 4th quarter have enforced zloty. On the other hand the factors that may have weakened PLN – such as rising markets' capital withdrawal this summer in expectation for Federal Reserve's monetary policy's tightening, have went mild for our national currency. In result zloty enforced itself in relation to most of the currencies, and in some cases the apreciation movement had been very clear – even around 20%.

Following months

New year's beginning should not ifnluence significantly the present trends on currencies. Zloty in relation to the main partners should continue its light enforcing trend, begun in the second half of current year. Apart from the earlier mentioned elements influencing PLN rate in a good way, we should also notice the inflow of new direct investments from abroad. Current year was one of the worse when it comes to BIZ. Despite that, together with the economic revival the return to last year's average has become possible and FDI on the level of about 10 billion EUR should inflow on the national market and because of that, also influence positively on zloty's evaluations.

Beyond EUR,USD, GBP and CHF

In everyday comments most discussed currency pairs are the main ones. If we will look on how zloty behaved in relation to euro or pound, we will not see any dramatic changes. On the last day of December 2012, GBP, EUR and CHF were close to their current levels (plus/minus 1%). Only American dollar has lost about 3% (about 9 groschen) in relation to zloty. There was a lot more going on with other currencies and that is the topic of following paragraphs.

Australian and New Zealand's dollar

One of the most interesting stories on currency market this year, was the significant devaluation of Australian dollar and a stable behavior of its equivalent from New Zealand. Through many years these currencies were moving in similar directions, but this year „aussie” lost over 13% in relation to „kiwi”. Main reasons for such significant movement was milder than expected monetary policy of Central Bank of Australia, the decrease of raw materials prices (the main export product), and also lower demand for iron ore from China. On the other hand New Zealand can be the first developed country in which the monetary policy's tightening will occure, and that clearly encouraged some wallet investors to locate their capital in NZD. These above factors have caused that in result Australian dollar got weaker in relation to PLN on 16% this year (over 3 years minimum), and New Zealand's currency lost about 3% (historicaly though we are still much closer to heights on NZD/PLN than lows, an during last 10 years the pair has balanced between 1.50 and 2.80; currently it is 2.47). Continuation of current trends is a base scenario, although „aussie's” devaluation should stop and another year probably will not finish with two digit descent.

20% loss of yen's value

Japanese currency has given a lot of emotions to market's participants. Activating the exceptionally expansive monetary policy by the Central Bank (considering the sizes of economy the amount loosening is 3-times bigger than in USA) and significant increase of government's expenses by prime minister Shinzo Abe, has caused clear yen' devaluation. Apart from that together with improving world's economic situation, yen was losing on meaning as a „safe coast”. These above factors have caused that JPY/PLN pair descended over 20%. Also zloty is strongest in relation to yen since 5 years (that is from the moment of Lehman Brothers bankruptcy). As for now signals that could change this trend can not be observed, and the base scenario for the end of year 2014 remains the two digit weakening of yen in relation to zloty.

Another 20% value losses – Turkish lira and South African rand

Above mentioned currencies were obviously the negative heroes of current year. Their weakness has been revealed in the breakthrough of spring and summer, when on the announcement of exiting from amount loosening, both TRY and ZAR have lost over 10%. Rand's further devaluation was also influenced by the prices of gold and platinum (Rebublic of South Africa's main export product), and lira on the other hand carries a burden of serious political crisis. We can also add to it significant budget and current turnovers calculation deficits, which financing is obstructed with withdrawal of foreign capital (both in Republic of South Africa and Turkey). In result the ZAR/PLN and TRY/PLN pair have decreased 20% each. It is also interesting that during 10 years rand has lost almost 50% in relation to zloty and Turkish lira – 46%. Most probable situation's development for following quarters is further weakening of above mentioned currencies in relation to PLN, although the year's devaluation should not be tho digit anymore.

CAD, RUB i NOK – 10% of loss on PLN

Common nominative case for the weaker behavior of above mentioned currencies is relatively low price of oil. Also in case of Canada we have Central Bank's will of keeping the mild monetary policy, which will stimulate the export in bigger degree, and decrease the deficit on current turnovers calculation. Monetary policy looks similar in Norway. Its Central Bank also tries to keep the expansive monetary policy. Also the clear decrease of system risk in Euro Zone lead to the fact that part of the capital located in Norway as a safe coast, came back to the Common Market. In Russia on the other hand, despite the control of dollar and euro basket by monetary institutions, ruble's weakening occured. Russian economy is clearly weaker than expected, and the influences of oil and gas are decreasing. There is no threat of a bigger crisis though, because our Eastern neighbours have one of the biggest currency reserves in the world (it is over 500 billion USD) and a high excess on the current turnovers calculation. When it comes to perspective for following months, the descend trend of these currencies in relation to zloty, should be stopped and it is also possible that Norwegian krone will return above the level of 50 groschen. CAD and RUB should be stable for following months.

Stable forint

The only surprise of current year is the stable behavior of forint in relation to zloty and its strong position (same as with PLN) to many foreign currencies with far better situation. If we would see the macroeconomic statistics for Hungary and the trends created on the market (investors on EM got clearly „frightened” of the economies with significant double deficits – on the current turnovers and public finances calculations – and the need of their financing in case of tightening of monetary policy in USA) this surprise should pass. Budapest has managed to work out a visible excess on the current turnovers calculation (about 2% of GDP), and the budget deficit remained on the safe level – 2%. Despite that, the perspectives for HUF are not quite optimistic – country's rating is still „garbage” and the public debt (after nationalizing the retirement contributions) is on the level of 80%. Economy is slowly comming out of recession quarters of 2012, but there are no visible chances for faster development. Considering all the factors, the HUF/PLN pair should either be stable in relation to zloty, or get a little weaker (not more than 5%).

Renminbi is also stable

High excess of current turnovers calculations in China, significant inflow of foreign investments, strong investment rating, biggest in the world currency reserves (over 3.5 trillion USD) and constant economic growth on the level of 7%, are perfect conditions for enforcing the local currency. But the policy of controlled USD/CNY rate, practiced in China for years, is aimed on renminbi's lowest as possible rate, so that this country could remain most competitive economy in the world. Throughout previous 10 years renminbi has forced in relation to dollar averagely by 2-3% per year. This tendency should keep up also this year. If we will predict that the rate of USD/PLN will also fall by a similar score, then the base scenario for CNY/PLN pair is remaining on the current level – that is about 50 groschen per one renminbi.

In conclusion

Last months show clearly the enforcing of zloty in relation to the currencies of rising economies, especially those that will have big problems in financing them in case of monetary policy tightening by main central banks of the world, because of their double deficits (current turnovers and budget calculations). Some extra factors that have enforced zloty in relation to other currencies are the political situation in some countries, worse than expected behavior of countries exporting the raw materials, withdrawall from „safe coasts” and also the expansive monetary policy and interventions of central bank. Most of these trends will keep up, thus the appreciation tendency for most of the currencies should remain the same.

31 Dec 2013 12:07|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

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