For several weeks now, investors have been grasping tightly for any excuse to retreat from the dollar. In the past few days, these have become the unexpected deceleration of inflation in the US and details of plans to ease pandemic restrictions in China. As a result, the zloty quickly regained momentum following the Monetary Policy Council's absence of a rate hike. With the EUR/USD rising towards 1.04, the dollar's exchange rate against the zloty hovered around the 4.50 PLN mark for the first time since mid-August. At the start of the new week, the USD is trying to break out of the sell-off spiral. The USD/PLN exchange rate is back to 4.55, while the EUR/PLN exchange rate is at 4.68. After settling below 5.40 PLN, the pound exchange rate is trying to break through 5.35 PLN permanently. The franc is, along with the yen and the Swedish krona, the only one of the main currencies not to have depreciated in November, with CHF/PLN back to 4.80.
Polish zloty: the EUR/PLN pair quickly returns under 4.70
After a brief correction and reaching 4.7250 zloty, the euro exchange rate returned under 4.70 PLN. As a result, last week's highs became a barrier closing the way for a deeper weakening of the zloty. Currently, the EUR/PLN pair seems to have an open the door to slide towards the 4.64-4.65 zone. In the context of the end of the year, a much more pronounced zloty appreciation and a drop of the euro to 4.55 PLN, i.e. the lowest levels since Russia's aggression against Ukraine set at the end of May, may be too ambitious a target. For it to become a reality, a prolonged high appetite for risk would be needed to push investors to change their perception of emerging markets permanently.
What is interesting to note is that both the spring and summer waves of EUR/PLN declines lasted exactly twenty-four sessions and were around 4% in scale. The autumn strengthening of the zloty fits almost perfectly into this characteristic. The press conference of the President of the NBP confirmed our assessment that the Monetary Policy Council does not intend to raise interest rates again. The cycle has not been officially completed, but its resumption in the first half of next year could cause serious trouble for the zloty or (above all) a dramatic change in the outlook for the path of inflation (no die-off of price dynamics after the first quarter peak).
On Wednesday, we heard the key assumptions of the new inflation projection, and today the full document will be presented. In addition, the publication of information on trends in the balance of payments is scheduled for 2:00 p.m. (CET). In turn, tomorrow's calendar will include the final reading of inflation in October, which, according to the preliminary estimate of the Polish Central Statistical Office, reached its highest level since 1996 at 17.9% year-on-year, and data on GDP growth, probably decelerating from 5.8% to below 3.5% year-on-year in the third quarter.
Dollar: decelerating inflation puts USD in trouble
US consumer prices rose by 0.4% month-on-month in October. The significantly lower-than-estimated reading translated into a deceleration of the index's annual growth rate from 8.2 to 7.7%. This is the second-lowest reading this year and the first time since February that the index has come in below 8.0% y/y. Core price dynamics retreated from a 40-year high, slowing from 6.6 to 6.3% year-on-year. The data set seems to confirm that CPI inflation has already established a ceiling and resonates with the conviction that the Fed's next rate hikes will be on a scale of no more than half a percentage point. The dollar was pushed into deep defensive territory after the data (amid risk appetite-fuelled news of easing covid restrictions in China).
The EUR/USD exchange rate is around 8% above the 20-year low at the end of September and has reached the vicinity of 1.04, the highest since August. Thus, the main currency pair has risen to a key area, namely the zone that held back the euro's sell-off in the year's first half. Pushing through it preceded the avalanche decline of the euro against the dollar, but it also halted the weakening of the USD in August. Significantly, this turnaround also took place after lower-than-forecast inflation reading from the US, which at the time did not lead to an easing by the Fed.
In the past week, the market has erased almost 20 basis points from a US rate hike pricing in the next six months. The room for continuing this negative trend for the USD may be very limited. It should also be remembered that the ECB surprised in October with its reluctance to declare that aggressive tightening would continue. Therefore, an attempt to extinguish USD weakness may again occur in a key sector. If it fails, the dollar's all-time high in strength will be definitively confirmed.