Recent EUR/PLN’s uptick unlikely to derail the Polish zloty rally for good (Daily analysis 1.06.2023)

In the second quarter of this year, the Polish zloty has emerged as a top-performing emerging markets currency posting solid gains against all major currencies. The PLN has recently even outpaced the forint, which posted a massive bounce after it bottomed out in October 2022. Contrary to its regional peer, the PLN rally has further space to run. We perceive recent EUR/PLN swing higher towards the 4.55 handle as a breather in a longterm PLN’s bullish trend.

In May, the EUR/PLN pair dipped below the 4.50 mark to trade at the lowest levels in almost two years. It took the Polish zloty over a year to completely retrace the deep collapse triggered by the Russian invasion of Ukraine, followed by a threat of a severe energy crisis and a serious economic downturn in Europe. However, in contrast to the Czech koruna and the Hungarian forint, the recovery progressed without significant assistance from the central bank. The MNB was forced to introduce extraordinary tools to halt the HUF's sell-off, which is now being dismantled. The CNB opted for massive FX interventions, which amounted to over 25 bn EUR between May and November 2022. At the same time, the NBP remained the most dovish among the CEE3 central banks. Now that the Fed tightening cycle seems to be over, this factor's importance diminishes, and an improving macroeconomic backdrop draws attention. In a more favourable market environment, the zloty should continue to trade firmly, and we expect the EUR/PLN exchange rate to settle below the 4.50 mark and continue to grind lower towards 4.40 in the second half of the year.

The zloty acts as a high beta satellite of the eurozone. It tends to perform well when the single currency does. However, there is much more to the PLN's recent run of strength than the single currency's resurgence and the start of the US dollar's long-term decline, which we continue to see as a key market theme for several quarters to come. Recent tensions in the banking sector could lead to relative underperformance of US assets. Polish inflation peaked in February and will return to single digits in the second half of the year. This should be followed by interest rate cuts in the coming months, which should attract foreign investors to local bonds.

The cornerstone of the Polish positive macro backdrop is economic resilience. Even as eurozone industry flounders and local private consumption falters, undermined by negative real wages growth, the Q1 GDP numbers came in at just -0.3 pct year-on-year and surprised to the upside. The growth outlook remains favourable as the economy will expand by no less than 0.5 pct this year before it returns closer to its potential growth. The GDP growth should accelerate to almost 3 pct in 2024. What is more, Poland may turn out to be one of the major beneficiaries of the rise of tensions between the West and China. Even now, it attracts FDIs on a previously unprecedented scale and should continue to flourish under the trends of nearshoring and friendshoring due to a strategic geographic location and vast and skilled labour force, additionally supplemented by an influx of refugees from Ukraine.

Another factor behind the PLN's impressive performance has been a marked improvement in the balance of payments. In each of the first three months of the year, a substantial current account surplus was recorded, thanks to a combination of cheaper energy and raw materials and weak demand for imported goods. Domestic political risks in the run-up to the general elections in the autumn are unlikely to deter investors significantly. On the contrary, after the vote, the long-running dispute with the European Commission may finally come to an end. The unblocking of over 35 bn EUR of EU funds would support economic growth, the external balance and demand for the zloty, as the Ministry of Finance exchanges its funds on the market rather than with the central bank.