Euro loses, franc and dollar appreciate, the National Bank of Poland tames the zloty sell-off (Daily analysis 2.03.2022)

The sell-off of the zloty and other CEE currencies was sharply deepened in the face of intensifying Russian invasion of Ukraine. The EUR/PLN surpassed 4.80, the highest level since 2009 and the Global Financial Crisis. A massive sell-off triggered interventions by the National Bank of Poland.

Polish zloty: exchange rates with new highs

10 February - on that day, the EUR/PLN exchange rate breached 4.50 for the first time since July. At around the same time, the temporary appreciation of the euro against the US dollar and the franc peaked. Since then, the euro has risen by a maximum of over 0.30 PLN, i.e. by around 7%. The zloty is one of the few currencies most sensitive to the Russian invasion. This is due to both the geographic proximity of the hostilities and the worsening prospects for economic growth, both on the Vistula river and in Poland's major trading partners.

The National Bank of Poland crystallized a positive trend for the zloty. Not only did it continue to raise interest rates (to 2.75%), but it also announced further increases in the cost of money, up to 4%, without harming the economic situation. Today, such a scenario is highly questionable.

The central bank's attitude towards the zloty also changed radically: its strengthening became desirable and was supposed to help fight inflation. As a result, the National Bank of Poland (NBP) decided yesterday to sell currencies on the market, stopping the sell-off of the zloty. For the time being, it was decided to act ad hoc, and the appearance of the NBP on the market will have a positive, stabilizing effect on the zloty. However, we will be able to talk about the zloty breaking out of the worst oppression only after the EUR/PLN exchange rate drops below 4.67.

Euro: optimistic forecasts become a thing of the past

The Russian invasion increases the likelihood of the dangerous stagflationary scenario on the Old Continent, in which price dynamics accelerates, and economic growth slows down. This makes investors prefer safe havens, i.e. the dollar and the franc, even more strongly than traditionally in moments of uncertainty and fear over the euro. The EUR/USD fell towards 1.11, and the EUR/CHF went down below 1.02.

In February, the single currency had its five minutes due to growing expectations that the European Central Bank would leave the club of "stragglers" in the queue to raise interest rates. The Russian invasion crushed the hopes for an acceleration in economic growth forecast by numerous sentiment barometers, including PMI indexes, and neutralized the more favourable outlook for the euro. In a dozen or so days, 35 bps evaporated from the valuation of the change in the cost of money in the horizon of a year. Today, financial markets are again pushing back expectations of a rate hike to 2023.

Swiss franc: SNB facing a dilemma

When Polish monetary authorities have to watch with concern as the zloty weakens in sight, Swiss central bankers have to face the opposite problem. Anxiety and fear and the troubled euro are water for the franc mill, which attracts capital like a magnet. The currency has been at its strongest against the euro since 2015. This fuels the discussion about where the monetary authorities' pain threshold lies. In recent months, the lack of a strong reaction to the deepening appreciation is explained by the disinflationary impact of this trend.

Also, after the Russian invasion, it can help reduce the nuisance of the inevitable rise in energy and food prices. However, if the strengthening trend gains momentum, interventions by the Swiss National Bank aimed at weakening the currency cannot be ruled out.

In the long term, the most important thing for the franc will be how fast the ECB will abandon its crisis monetary policy and how soon before the SNB raises interest rates. Last year, the eurozone monetary authorities took such a soft stance that they found themselves in league with the central banks of Switzerland or Japan, i.e. those that have no room for manoeuvre and will remain faithful to a loose policy for many quarters. There was a light at the end of the tunnel in the previous weeks, indicating that the ECB would be leaving the club of normalization stragglers. The change in communication was behind the temporary rise of EUR/CHF to 1.06. In the face of the war in Ukraine, which according to some policymakers, will increase the likelihood of stagflation on the Old Continent, the optimistic forecasts for the euro are again very quickly becoming outdated, at the same time burying hopes for a much cheaper franc.