Almost everything favored the złoty, especially record highs on Wall Street, the awakening of emerging markets, a weakening dollar, and the stance of the Polish Monetary Policy Council (RPP). Certainly, it is a good time to buy dollars for summer vacations.
Looking at a five-year perspective, the minimum was 3.61 PLN per dollar, and the maximum was 5.05 PLN. The minimum occurred in December 2020, while the maximum was in October 2022.
“The złoty is very strong, but the pace of its appreciation has slowed since the beginning of this year,” said Michał Stajniak from XTB in an interview with MarketNews24. “Now, it is important that although inflation in Poland has rebounded to 4.2%, it won’t be as high as feared due to the reinstatement of VAT on food or changes in energy prices. Inflation is unlikely to rise to 8-9%, and CPI inflation will probably stabilize at 5-6%.”
There are many external factors that have favored the złoty. We can certainly talk about the period of record highs on financial markets in May. Records were set on Wall Street in response to slightly better inflation data from the US, as well as the introduction of a new model by OpenAI, which sparked a renewed AI boom.
In Europe, we have records in the metals markets, concerning gold and copper, with significant increases also seen in silver, nickel, and zinc prices. These puzzling rises are partly driven by news that the Chinese government is forcing state-owned companies to “intervene in real estate purchases.” Nevertheless, the scale of the increases is substantial and doesn’t necessarily correlate with incoming business activity data. Regardless, this trend generally benefits emerging markets, which helps strengthen the złoty.
Additionally, the złoty is supported by the stance of the RPP, which, despite favorable recent inflation data, signals a lack of readiness to lower interest rates this year. At the same time, we almost certainly know that the ECB will lower interest rates in June.
These trends are so favorable that the Polish market is not reacting at all to alarming news from Ukraine, and it can be assessed that the “frontline country” risk premium virtually doesn’t exist today.
As a result, the EURPLN exchange rate in May was at its lowest since January 2020, the GBPPLN rate was the lowest since December 2022, and the much-hated CHFPLN was the lowest since February 2022. Although USDPLN held up, we still tested the 3.90 barrier.
However, the exchange rate should not be viewed solely nominally. When considering the inflation difference since then, the adjusted exchange rate is similar to that of August 2008! Of course, this is a simplification. Inflation in Poland is largely service inflation, where prices are also rising due to increasing societal wealth. The actual fundamental exchange rate is impossible to capture, but one can argue that the złoty is noticeably overvalued.
“Core inflation will now be very important, especially since the wage growth rate in Poland is very high,” commented the XTB expert. “The 3.90 PLN per dollar level remains a very important psychological level that will be difficult to surpass and will restrain the złoty’s rally.”
Nominal wage growth in the enterprise sector employing over nine people decreased in April to 11.3% y/y from 12.0% in March, falling below the market consensus (12.1%). This double-digit nominal wage increase was broad-based and recorded in most categories reported by GUS. In real terms, after adjusting for price changes, wages in companies increased by 8.7% in April compared to 9.8% in March.
The extremes of the złoty’s strength have typically been noted before major external shocks, and a catalyst in global markets would be needed to change the current state of affairs. So far, such reasons are not visible.
“Uncertainty about Fed policy concerning US inflation is important for the złoty, which could lead to a stronger dollar,” summarized M. Stajniak from XTB. “I do not rule out a return to 4 PLN per dollar, and it is worth considering seasonal trends, as May and June are usually good for the złoty, while during the summer, the złoty tends to lose value. Hence, it is still a good time to buy dollars for summer travels.”
