Our view on the Polish zloty has remained generally bullish, although some tweaks to our short-term view have been made to adjust for the National Bank of Poland’s decision to intervene in FX markets in December.
Their actions in December, combined with the comments from the January and February meetings, sent a psychological message to markets that they intend for the EURPLN rate to stay above 4.45 until economic conditions warrant further zloty strength. Back in November, we expected EURPLN to trade to 4.5 over the 1-month horizon and gradually make its way to 4.3 towards the end of 2021.
However, given the NBP’s intervention in FX markets in December, we argue the central bank will continue to focus on the exchange rate more heavily until the recovery phase is well underway.
This has resulted in us adjusting our short-term forecasts accordingly while maintaining our bullish view over the 1-year horizon. The NBP will likely step back from intervening in currency markets once domestic and global growth conditions allow the economic recovery to resume, which we now don’t envisage until H2 2021. On the fiscal front, one thing that has changed since November is the ratification of the EU recovery fund. Back in November, we stated the Hungarian-Polish veto was a downward risk to the zloty outlook but we expected the recovery fund to be ratified regardless. Given the fund has now been approved by all EU members, one downside risk is out of the way now, meaning Poland’s recovery path depends on domestic vaccine distributions and the reopening of both the domestic and the eurozone economy.
Monex Europe’s February PLN forecasts
NBP’S INTERVENTION IN DECEMBER PUTS A PSYCHOLOGICAL CAP ON EURPLN AROUND THE 4.45 LEVEL IN THE COMING QUARTER
The National Bank of Poland is no different from any other central bank in its goal to support an economic recovery in 2021. However, the NBP has consistently acted as the most dovish central bank in the region, explicitly communicating their preferences for a weak zloty to strengthen the impact of previous stimulus measures, while referencing the possibility of a rate cut to achieve this. For now, their preference for a week zloty has resulted in the NBP intervening in currency markets to safeguard against the market effect. The intervention was deemed necessary by the NBP as the subdued inflation outlook poses a risk to the economic recovery. Although headline inflation printed at 2.4% YoY in December, which is perfectly in line with the 2.5% +/-1% target of the central bank, recent inflation data continues to highlight a disinflationary effect, evidenced by December’s monthly CPI figure of just 0.1%. Inflation is slowing down due to imported inflation, a by-product of a strong zloty, and the NBP’s inflation report from November showed that price growth in Poland would likely remain low in the coming years as well. This has provided the rationale for the NBP to intervene in the EURPLN cross, but the central bank cannot intervene in FX markets indefinitely as this will lead to a blow up in their FX reserves, which will not be sustainable in the long run. At the same time, FX intervention would lose its necessity once economic conditions pick up and domestic inflation pressures return as well. This will likely coincide with improved demand conditions in the eurozone, leading to higher inflationary pressures. Given this, we expect the NBP’s intervention at the 4.45 level to be short-lived, with their tolerance towards zloty strength to increase throughout the second half of the year.
Risks to CPI inflation outlook remain skewed to the downside over the next years according to the NBP’s inflation report
Source: Statistics Poland (GUS) data, Narodowy Bank Polski
Weak import inflation seems to be a key factor in Poland’s moderate inflation readings at the moment, as over 60% of Poland’s yearly imports come from the eurozone – a region that has a hard time promoting inflation itself, both before and throughout the pandemic. Germany, which accounts for roughly 35% of Poland’s total imports, experienced weak inflationary pressures as well with CPI in December printing at -0.3% YoY compared to the 2% target of the ECB. Meanwhile, the softening in Poland’s inflation data does not seem to be domestically driven by a loose labour market either. Even though September to November 2020 saw the unemployment rate remain the same, wages did continue to grow on both a monthly and annual basis due to the restoration of worker productivity and non-wage benefits, as well as the execution of previously suspended wage increases by the Polish government.
This leads us to believe that the moderation in inflation has been driven by a decline in import inflation, to which a weaker EURPLN rate plays a pivotal role.
An improvement in economic conditions both domestically and externally would make it more difficult for the NBP to justify any intervention in currency markets. Until then, further verbal and actual intervention may be on the cards from the NBP in the EURPLN cross.
In February’s monetary policy meeting, the Council continued to warn for FX intervention as markets’ forces pushed EURPLN below 4.5, but with no intervention being explicitly announced, the NBP signalled to markets that the current threshold is at 4.45 on the EURPLN cross despite their latest intervention occurring at 4.5.
Previous intervention occurred around the 4.5 level, but the February meeting lowers the threshold to 4.45
FX INTERVENTION MAY BE ON THE CARDS UNTIL MACROECONOMIC CONDITIONS ALLOW FOR POLICY NORMALISATION
The decision by the NBP to intervene in currency markets around the 4.45 level and the explicit mention that a weak zloty would undermine the economic recovery in Poland sends a psychological message to markets that EURPLN won’t move below 4.45, as the NBP has now created an expectation that they will intervene in that region. Once the global and domestic backdrop eases, and the FX rate no longer undermines the economic recovery via slow price growth, the central bank may allow EURPLN to move freely below 4.45. Our forecasts suggest this will occur over the 3-to-6-month horizon.
GDP in Q3 2020 recovered in Poland, but annual GDP growth still printed negative at -2.8% in 2020. Exports had picked up in Q3 2020 supported by the loosening of lockdown measures abroad, but the tightening of measures in Q4 in both Poland and the eurozone has likely taken a toll on trade and output. Retail sales and industrial production fell in October and November as the second wave hit, but the numbers recovered in December. Poland started easing some of its lockdown measures on February 1, with shopping centres and museums allowed to open, while restaurants and hotels remain closed. Risks of a third wave remain high at present as the rate of vaccinated people is low compared to the UK and US. Only 3 doses per 100 people have been administered in Poland so far compared to 15% in the UK and 10% in the US, however, the rate of vaccine distribution in Poland is comparable to that in the EU. Poland expects 6 million doses by the end of March, which should be sufficient for 2 shots for 8% of the entire population.
While we maintain our bullish stance on PLN over the medium and longer-term, slow distribution of vaccines both domestically and globally provides a downside risk to our zloty view.
EM currencies were pushed up to record highs as the dollar lost ground in December, however, the decline in the dollar ran out of steam following hiccups in vaccinations in January, with Pfizer and AstraZeneca reporting supply disruptions and delays while Moderna reported its vaccine is less effective against the South African strand. Beyond that, political unrest continues to be a downside risk factor to the zloty, as many people remain outraged at the ruling right-wing Law & Justice party, which have led to many demonstrations over the past months. On January 27, new legislation came into force that makes it almost impossible to get an abortion except in cases of rape, incest or when the pregnancy threatens the life of the mother. If the domestic protests would spark overall political uncertainty and the potential for a change in administration, the level of risk to the Polish economy and the zloty outlook would increase substantially. As long as overall political risks remain subdued and the vaccine roll out allows for a global and domestic recovery, we envisage further zloty strength towards the 4.3 level in EURPLN by year-end while FX intervention by the NBP may keep the pair supported above 4.45 in the coming quarter.
Author: Ima Sammani, FX Market Analyst