The zloty remains the top performer as the USD falters

The dollar's exchange rate against main currencies has had one of its three biggest weekly declines in 2023. The Polish zloty has maintained its position as the world's strongest-gaining currency this quarter. This is the aftermath of data from the US economy: a low inflation reading complemented by a disappointing labour market report. In the face of the latest news, investors finally lost faith that the Federal Reserve could raise interest rates in December. In fact, the financial markets started betting that cuts would start in the US as early as the first half of 2024.

The overvaluation of the US currency creates a positive environment for emerging markets. At the same time, it makes it possible for the zloty to benefit fully from the post-election improvement in local fundamentals, favouring domestic equities and long-term bonds. This is made up of a change in the perception of future fiscal policy, the repair of relations with the European Union and the imminent unblocking of the EU funds. At the same time, the attractiveness of the zloty is increasing as it has become clear that the Monetary Policy Council will, at most, symbolically cut interest rates from the current level in the coming quarters.

We believe that the zloty in the broader horizon has not said its last word. The euro exchange rate is expected to slide to pre-pandemic lows next year and slide towards 4.25 PLN. The dollar against the euro and other major currencies is likely to continue its long-term downtrend moving forward as it loses its competitive hallmark of strong outperforming economic growth. However, the recent reshuffle has been so strong that a rebound is possible towards the year's end, pushing exchange rates slightly higher than they are now. Conotoxia's forecasts for the exchange rate of the main currency pair assume that the EUR/USD pair will end the year in the current vicinity of 1.09. A sustained improvement in perceptions of the prospects for the Old Continent's economy may be necessary to further increase the value of the euro against the dollar.

While a December interest rate hike has never been our baseline scenario, we believe the market may have priced in too early and sharply the Fed's rapid rate cuts. The current discount assumes that in a year's time, the cost of money will be around 70bp lower than it is now, which does not correspond with the harsh stance of Federal Reserve members unwilling to allow premature loosening of financial conditions in the economy.