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Sunday, February 25, 2024

PLN exchange rate to euro, dollar, Swiss franc, British pound. Bartosz Sawicki comments

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The zloty is not slowing down and in recent days the rates of the main currencies have breached round barriers or reached long-term lows – comments Bartosz Sawicki, an analyst at Cinkciarz. The expert adds that in the current quarter “there is no currency in the world that is gaining faster than the Polish zloty.”

As Bartosz Sawicki explains, the strengthening of the zloty “is the result of a combination of favorable local and global factors.” “First of all, financial markets are no longer afraid of the sharp attitude of the Federal Reserve, which previously caused avalanche drops in bond and stock prices and favored the strength of the American currency. The conflict in the Middle East is also being observed with less concern,” the analyst comments.

Notes that euro exchange rate during the holidays and just after the elections it bounced from the level of PLN 4.40. “The third time it was breached and EUR/PLN, falling to 4.34, was the lowest since the pandemic in March 2020. The zloty and Polish assets benefit from a change in the perception of the prospects for monetary and fiscal policy. The new government, in order to fulfill its pre-election promises, will initially have to increase budget deficit. In the coming year, the Monetary Policy Council will at most symbolically reduce the cost of money from the current level of 5.75 percent. In the shorter term, this will increase the attractiveness of the Polish zloty, and in the broader term it will reduce the risk that persistent inflation will lead to the erosion of the foundations of the economy,” the analyst says.

What next with the euro/zloty exchange rate?

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Bartosz Sawicki points out that investors were relieved that the conflict with the EU had ended and they expect the EU funds to be quickly unblocked. “They will help lift economic growth out of the doldrums and consolidate the improvement in the balance of payments situation. If necessary, the government’s currency funds will be able to be exchanged on the market, and not in the central bank, which, like an anchor, will stabilize the zloty in episodes of turbulence on global markets. An advantage of the zloty is there will also be relatively strong economic growth,” he comments.

“Consumption will rebound by several percent in 2024, and GDP dynamics will exceed 2.5 percent. The above arguments support the zloty remaining on an upward path. In 2024, the euro exchange rate will settle at pre-pandemic levels, EUR/PLN will gradually slide towards 4.25, and the quotations should be less volatile than in the past three years. At the end of this quarter, the Polish currency may be out of breath after a sharp sprint. We expect that the common currency at the end of December may cost a few cents more than currently,” he writes expert.

“The dollar has already experienced an episode of strong strengthening”

According to Sawicki, the strengthening of the zloty will not be hampered by the situation in the quotations of the main currencies. “The dollar has already experienced an episode of strong strengthening since July. USD/PLN breached the 4.0 barrier for the first time since mid-summer. The American currency has started another installment of the long-term downward trend. It will continue along with the deceleration of economic growth and the continued decline in inflation. The dollar will not only lose its current distinguishing feature in the form of economic strength, which contrasts sharply with the threat of recession in the euro zone and the anemia of the Chinese economy, but will also come under pressure from interest rate cuts,” we read in Sawicki’s comment.

“At a time when the US GDP dynamics will decline, the growth rate in Euroland will accelerate slightly, which will additionally work to the detriment of the USD. In 2024, the continued strength of the Polish zloty and the weakness of the dollar in relation to the main currencies will cause USD/PLN to settle below 4.0 and then reach 3.70. However, the recent depreciation of the American currency may have been a bit premature and too sudden. A change in the Federal Reserve’s attitude is necessary, but it should be less radical and take place later than investors currently expect. As a result, in In the coming weeks, the momentum of the depreciation may fade and we forecast that the dollar exchange rate will end the year around PLN 4.05,” the analyst predicts.

The strongest currency

The expert points out that currently the franc is the strongest of the major currencies. “CHF/PLN fell by about 4 percent while USD/PLN recorded a twice as strong decline and the euro fell by about 6.5 percent. This is due to active support from the central bank striving to maintain strength through CHF. The SNB depends on this at a stable real effective exchange rate, i.e. a measure reflecting the structure of foreign trade and taking into account differences in inflation dynamics. The price pressure in Switzerland is weaker than in other economies, which means that in order for this indicator not to change its value, the franc must become more expensive in relation to the euro, dollar or pound. In October, the outbreak of the conflict in the Middle East became an additional source of demand for the franc,” we read.

“When the impact of this factor expired in November, the exchange rate of the Swiss currency violated PLN 4.50. CHF/PLN was the lowest since June 2022, when the Swiss central bank shocked the world by starting interest rate increases without announcement and before the tightening cycle started by the European Bank Central. The franc should gradually equal the value of the common currency, but it will be a long process. Inflation in Switzerland has not exceeded 2% for half a year. With each month that the CPI dynamics remains below this barrier, the belief in the Swiss National Bank that the pressure pricing has been brought under control,” writes the expert.

He adds that “as a result, the current preference for a strong franc, which has been transformed into currency interventions over the past dozen or so months, will weaken over time.” “However, we do not expect interest rates to be reduced from the current level or to weaken the currency in order to support it. Therefore, the return of EUR/CHF to 1.0 will have the character of a jerky drift. In a year, the franc should cost approximately PLN 4.25. However, in winter, due to concerns about the condition of the European economy, the declines in the CHF exchange rate may slow down,” says Sawicki.

Main photo source: Shutterstock

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