Over the past four months, the Polish Zloty has increased significantly against the Euro, following a sudden drop last December.
Source: Yahoo Finance
Additionally, on a purely technical basis, the currency seems set to go higher with the 20-day SMA crossing the 100 and 200-day SMA to the upside. However, what is quite interesting is that since early 2014, the PLN has continuously been on a downward spiral against the USD.
Source: Yahoo Finance
While the USD is strengthening against virtually all major currencies right now, the fall of the PLN against the USD is not surprising. However, the PLN's slow, but steady rise against the Euro is intriguing. When comparing the Eurozone and Poland on an economic basis, the rates of GDP growth and inflation in the two economies are quite similar.
Source: Trading Economics
However, it is notable that Poland's reference interest rate of 1.5 percent is quite higher than the Euro area reference interest rate of 0.05 percent and the United States reference rate of 0.25 percent. While GDP growth and inflation rates in Poland have been lagging, the National Bank of Poland has not cut interest rates in the country to as large an extent. For instance, while on March 4 the central bank had cut interest rates by 50 basis points to 1.50 percent, admittedly the lowest on record, the bank had also proclaimed that such a cut would be the last in the current easing cycle - the European Central Bank has not made any such commitments. In addition, the central bank expects growth rates to remain above 3 percent over the next two-year period.
In light of the recent interest rate cut, is the Zloty a good play against the Euro? At this moment in time, I would be inclined to say no. The US Dollar is acting as a beacon of strength against the vast majority of major currencies right now, and I expect that this will continue through at least the first half of 2015. However, with the Federal Reserve indicating that rates will rise in 2015, it will be interesting to see how the Zloty reacts going forward. As it stands, the reference rate for Poland is high compared to the United States and Europe and would likely remain comparatively high should the Federal Reserve raise rates. A rate rise by the Federal Reserve will either have the effect of making the currency stronger due to higher rates, or concerns of the impact on growth may serve to weaken the USD. Should the latter scenario materialize, then the Zloty may just come to be seen as a good play in the currency markets given promising GDP Growth prospects in Poland coupled with a higher benchmark interest rate.
In conclusion, while the USD is stronger against both the Euro and the Zloty at this point in time, it will be interesting to see how a decision by the Federal Reserve to raise rates will impact the prospective currencies going forward. Should the tide turn and we see USD weakness, coupled with low growth in the Euro area, then the Zloty may well appreciate against both currencies in response.
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