EUR/PLN: Function of the Market?

The last 2015 policy meeting of Narodowy Bank Polski, (as well as being the last policy meeting for the current board), was held on 1-2 December, just one day before the ECB took another measured step, reducing its deposit rate further into the negative at -0.30%. 

It should be noted that aside from Germany and the UK, the three EU members, Hungary, Czech Republic and Poland have been among the European top performers. Central to this above the norm activity has been its shared manufacturing relationship with other EU members, particularly that of Eurozone member Germany. Nearly 26% of total exports are destined for and 22% of total imports originate from Germany. Nearly 45% of all exports are destined for and nearly 42% originate from the Eurozone. Lastly, 65% of exports are destined for and 48% of imports originate from the EU. Hence, maintaining trade parity with the Eurozone is of vital importance for the Polish economy.

At the December 2015 meeting, the NBP made note of the exogenous risks to the economyi. “... In the euro area and the United States, GDP growth slowed down in 2015 Q3. At the same time, incoming data point to the continuing recovery in these economies in successive quarters. In turn, Russia and Brazil remain in recession. In China, GDP growth in 2015 Q3 decelerated again, but incoming data indicate its stabilisation. Yet, the possibility of a sharper deterioration in economic conditions in the emerging market economies remains a significant source of risk for global growth...” Having stated such, the NBP left its four benchmark rates unchanged. The chart demonstrates the short term response; the Zloty first weaken slightly but quickly recovered for a net unchanged result from the time of the ECB meeting then heading into 2016. However, the Zloty weakened vs the Euro from about the first of January, through the NBP 15 January meeting and bottomed on the day of the 21 January ECB meeting at zł4.49231 per Euro. Were markets expecting a NBP response to the ECB December actions at the 2-3 February NBP meeting and then disappointed?

There were four other influencing factors which, perhaps, caused further Zloty weakening vs the Euro. As mentioned, a new NBP board would be appointed in 2016. Second, the populist wave which had swept moderate governments from office, replaced by conservatives, created domestic economic concerns. Third, the EU was still being overwhelmed by waves of refugees from the warring regions of the Middle East. Lastly, but perhaps most influentially, was Poland’s still unresolved foreign mortgage issue. Most were denominated in Swiss Franc and the Franc was still strengthening.



The NBP reiterated its concerns for the global economy as well as the divergence of US Fed and ECB policies at the 13-14 January policy meeting, but no mention of the foreign mortgage resolution plan which was to be announced the next day. The government’s foreign mortgage resolution plan may have been the key driver of the Zloty reversal from its 52 week low vs the Euro. Further, about halfway through the trend, the ECB expanded its easing policy across the board including its asset purchase program, 10 March. The NBP was scheduled to meet the very next day. 

The NBP again maintained its policy across the board. The NBP inaction may have been more of a result of the confusion between the ECB and US Fed policies: “...The European Central Bank lowered interest rates in March and increased the scale of quantitative easing. In the United States, despite an increase in interest rate in December and indications of a further increase in the coming quarters, uncertainty about the future direction of monetary policy has risen...” However, the NBP did express content with the current state of the Polish economy. The Zloty continued to gain on the Euro, recovering its losses experienced since the very end of 2015; i.e., since the December ECB meeting. Markets may have regained confidence in the NBP’s willingness to maintain policy. Also in favor of the Zloty was the cooperation agreement between the EU and Turkey over unchecked refugee flow. This would certainly weaken the anti-refugee plank of the newly elected conservative government’s platform.

At the most recent meeting, 5-6 April, the NBP again voiced its concerns over the global economy and also noted the extended trend of low commodity prices, a benefit for the Polish economy. Was this a signal for maintaining the current policy? The NBP seems to be off to a good start in the first quarter of 2016. The Zloty seems to be maintaining its all-important parity with its EU trade partners as a function of market expectations; i.e., uninfluenced by central bank actions; a rare occurrence among currencies in these times.
The Zloty would likely have to strengthen or weaken sharply for the NBP to intervene. As it is, should the ECB maintain policy at the upcoming 21 April meeting, the Fed remain on hold and the Polish financial sector hold up well as it unwinds it foreign mortgage holdings, it wouldn’t be unreasonable to expect the Zloty to test the zł4.163 52 week Fibonacci retracement level.