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Weekly Currency Brief

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Złoty declines on increased risk aversion

Fri, Apr 24 2009, 14:06 GMT
by Adam Narczewski

X-Trade Brokers, XTB

After three consecutive weeks of gains, this past week the polish currency declined in value. Usually, the Złoty follows the EUR/USD trend but this correlation has been broken recently. Investors worldwide were shocked by U.S Secretary of Treasury, Timothy Geithner, who said that most banks in the U.S would survive turbulent financial times, according to the “stress tests” performed recently on the 19 biggest U.S financial institutions. That stopped declines on capital markets but did not help the USD. The Eurodollar began its journey up north finishing the week at $1.3270, after better than expected Ifo Institute economic sentiment index reading.

The Złoty declined despite increases on the Warsaw Stock Exchange with which it is usually positively correlated. Risk aversion towards the polish market increased after the government said that budget deficit increased to 3.9% of polish GDP. If Poland wants to join the ERM2 system, budget deficit needs to stay below 3% of GDP so as for today Poland does not meet the fiscal criteria to join the ERM2 system. What made the situation worse was Moody’s rating agency decision to decrease Latvia’s and Lithuania’s credit rating. This decision reminded investors about the risk involved while investing in emerging markets economies. It is possible for the Złoty to keep depreciating, at least at the beginning of the week. On Friday, the EUR/PLN is being quoted at zł.4.5008, the USD/PLN at zł.3.3884 and the CHF/PLN at zł.2.9815.

Published on  Fri, Apr 24 2009, 14:07 GMT