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Złoty Strengthens Against the Dollar Despite Government Deficit Increase

INVESTINGZłoty Strengthens Against the Dollar Despite Government Deficit Increase

Among the so-called extended group of the most crucial currencies globally, the Polish zloty ranks third, gaining about 11% against the dollar. D. Tusk’s government’s increase in the budget deficit has not harmed the Polish currency so far.

The dollar’s weakness and the favorable situation on the most crucial currency pair worldwide, EURUSD, may support our domestic currency. The quotations of the main currency pair managed to break the round level of 1.10 USD, with tops ending in November 2023.

“We could expect that the new government will decide to spend more in their first year of governance and despite the EU’s recommendations that the budget deficit should not exceed 3% of GDP, it will still be at a 5% level,” says Michał Stajniak, an expert at XTB, in a conversation with MarketNews24. “Rating agencies should accept this with understanding, especially since there are countries in the EU with a much worse debt-to-GDP ratio.”

If the upward trend on EURUSD continues, the zloty can continue to strengthen. Notably, the USDPLN rate remained below the level of 3.94 PLN in the last days of December, which technically supports the scenario assuming further declines. Meanwhile, EURPLN remains in consolidation; however, the long-term trend on this pair is also bearish.

“Increasing the deficit may be treated by investors as a warning sign, but at the same time, we must count on these higher expenditures falling in a period of increased hopes for Poland to obtain funds from the KPO, this way GDP growth will be larger than the government assumed in the budget act,” comments the XTB expert.

The strength of the zloty is primarily the effect of the dollar’s weakness. The dollar has had a very mixed year. Among the currencies that gained the most against the dollar, we have quite exotic currencies that had previously lost heavily to the dollar. This includes the Colombian peso, which is stronger by 22% this year, and the Mexican peso gaining nearly 15% against the dollar. Among the so-called extended group of the world’s most crucial major currencies, we have the zloty in third place, gaining 11% against the dollar. However, in the top 10, we can find currencies such as the Swiss franc, the British pound, the Swedish krona. The euro gained minimally since it is about 3% against the U.S. dollar. Due to prospects of the Fed lowering interest rates, as early as March 2024, the EURUSD pair should have even further growth prospects.

The persisting double-digit wage growth dynamic could theoretically hurt the zloty. Pursuant to the Central Statistical Office (GUS) data, the nominal wage growth rate in the enterprise sector employing more than 9 people decreased in November to 11.8% YoY against 12.8% in October, shaping up above the market consensus (11.4%). In real terms, after correcting for price changes, wages in companies increased in November by 4.9% YoY compared to a 5.8% increase in October. Hence, the average three-month real wage growth rate in November was 4.2% YoY and was the highest since July 2021.

“Wage growth dynamics in 2024 should be lower due to the base effect,” explains M.Stajniak from XTB. “It’s also worth noting that the number of unemployed is rebounding for us, so there will be less wage pressure, which is important given concerns about inflation rebound. We should keep this in mind, although at the moment it looks good. There isn’t much room left for the zloty to strengthen, and we are very close to the peak.”

There are no real reasons for increased worries about a recession. Ahead of us lies rather the scenario of a “soft landing.” The prospects for the Polish economy are rather good unless there is a global recession.

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