Polish Zloty: Risk-Off Sentiment Could Mean Downside Against Greenback

Includes: EPOL, PLND
by: Discount Fountain

The Polish zloty has been seeing a decline lately along with the euro.

Current market sentiment is not conducive to "risk-on" currencies.

For this reason, I expect the zloty to decline further.

Last month, I made the argument that the Polish zloty could see further growth over the medium to long term, owing to renewed quantitative easing by the Federal Reserve and ECB.

With this being said, we can see that the zloty has seen a sharper fall than the euro against the greenback in the past month:

Source: investing.com

With China now having weakened the yuan in response to proposed tariffs by the United States, the stock market has been declining further.

The euro has failed to breach the 1.25 level against the greenback in the past four years, and it is highly likely that the EUR/USD will settle below this level over the long term.

That said, let’s compare the PLN/USD to the EUR/USD over a longer term period:

Source: investing.com

We can see that the zloty and euro have moved more or less in tandem, and the zloty has seen a larger decline overall against the dollar this decade.

Since the zloty is technically an emerging currency, it is plausible that the currency is likely to see an overall decline against the greenback over the long term.

Given that the euro area has seen a decline in investor confidence to the lowest level in five years, the zloty has understandably been following suit.

While the zloty has historically seen strong rises compared to other emerging currencies during risk-on periods, we can see that other currencies such as the Mexican peso has recently been outperforming the zloty:

Source: investing.com

In this regard, while I made the argument previously for a long-term rise in the zloty - it is highly unlikely that we will see it in current conditions that appear to be looking increasingly recessionary. That said, with the ECB having committed to further quantitative easing and the National Bank of Poland having committed to a rate hike after 2020 given higher inflation - the currency might likely see a decline along with the euro until such time that the central bank commits to raising rates.

As an emerging market currency, the zloty has historically seen performance during strong economic periods. However, now does not mark one of those times, and I expect further downside ahead against the greenback.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.