PLN/EUR: I Take A Bearish View

Summary

• The Polish zloty has seen a strong decline against the euro.
• Economic growth in Poland is forecast to weaken considerably.
• I take a bearish view on the Polish zloty at this time.

The Polish zloty has taken a hit against the euro since mid-March. However, we see that the currency has not rebounded, unlike other European currencies such as the British pound and Swedish krona.

Source: investing.com

When I last covered the PLN back in December, I argued that there was limited room for upside in the currency. Even when the National Bank of Poland had been forecasting 4.3% YoY growth for 2020, no changes in rates were expected until late 2021 at the earliest.

Needless to say, the growth forecast made by the central bank last year will invariably be revised lower as a result of the COVID-19 pandemic. Moreover, the zloty is treated as an emerging market currency for all intents and purposes, with the zloty often seeing a strong surge upwards during periods of heightened risk appetite.

Given the combination of much weaker growth forecasts for the economy ahead, coupled with a dampening of risk appetite, it is little wonder that we have not been seeing growth in the zloty.

The weakness has been exacerbated by the fact that the National Bank of Poland has had to cut rates by 0.50%, with the reference rate now standing at 0.50% and the deposit rate standing at 0.00%.

The central bank forecasts that markedly weaker price growth will materialize as a result of a fall in commodity prices and lower domestic demand. Even with the cut in interest rates, there remains the possibility that inflation rates will end up falling below the central bank’s target. If this happens, then negative rates cannot be ruled out, and this is likely to have a further depreciating effect on the Polish zloty.

The World Bank also forecasts that GDP growth in Poland is expected to drop from 4.1 percent in 2019 to 0.4 percent this year. However, Poland’s public debt was at quite a respectable level in 2019, standing at 47.4 percent of GDP. While this will invariably increase as a result of increased government spending to get Poland through the crisis, the country does appear to have the facilities to mitigate the effects of the anticipated downturn in so far as possible.

As concerns the euro, there has been a lot of criticism over the way the European Union has handled the crisis, with ongoing disagreements over how peripheral nations such as Italy and Spain should be funded to tackle COVID-19.

Certain nations are arguing for “coronabonds”, or a common debt instrument that allows all EU countries to share the debt – while countries such as Germany and the Netherlands are against such a proposal.

In this regard, the future of the European Union has been brought into question once again, and therefore it is unsurprising that the euro has been coming under pressure.

With this being said, a “worst-case scenario” collapse of the euro outright would also have a strongly negative effect on the Polish zloty. If one assumes the doomsday scenario of a country like Italy leaving the euro and others then following suit, there is an incentive for individual countries to devalue their own currencies to keep their export markets competitive. Given that the European Union is Poland’s primary trading partner, the country would be forced to do the same and we would accordingly see a weaker zloty.

Taking this into consideration, I take a bearish view on the zloty and expect that we will see further declines against major currencies such as the euro and U.S. dollar, at least over the short to medium-term.

Analyst’s 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.