Polish Zloty (PLN) on the Up amid Rate Cut Expectations

on Oct 3, 2012
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The Polish zloty (PLN) pared some of its recent losses ahead of the country’s central bank meeting on Tuesday, The Financial Times reported on 1 October 2012. The currency was pushed higher by hopes that Poland will follow the example of other Eastern European countries and cut interest rates.

The eastern European bloc’s close banking and trade ties with the troubled Eurozone have left it vulnerable to the deepening debt crisis. Amid May’s increased fears that the Eurozone would break apart, the eastern European currencies weakened significantly against the euro. But since the European Central Bank (ECB) helped to support sentiment, the euro has fallen nearly 3 per cent against the Czech koruna (CZK), over 6 per cent against the Hungarian forint (HUF) and almost 8 per cent against the Polish zloty (PLN). The only exception in the region was the Romanian leu (RON) which underperformed its neighbours due to political issues during the period.

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!m[](/uploads/story/509/thumbs/pic1_inline.png)Yet, the optimism that followed the European Central Bank’s announcement of a new bond-buying programme is fast dissipating. After failing to keep last month’s gains triggered by the brief risk rally amongst emerging markets, Eastern European currencies have been struggling. In an effort to spur economic growth in the region, last week the Czech National Bank (CNB) cut its main policy rates to new historic lows. The CNB’s base two-week repurchase agreement rate is now 0.25 per cent, and the bank’s governor, Miroslav Singer, said further cuts may be made in the future. The Czech move followed an interest rate cut in Hungary. For a second consecutive month, the Hungarian central bank cut the country’s base rate by 0.25 percentage point, to 6.50 per cent. And while, Poland’s central bank has not followed suit yet, it stands ready to do so in order to boost economic growth in the face of the ongoing European debt crisis. Investors are expecting interest rates to be cut by a quarter point to 4.5 per cent, after the president of the National Bank of Poland, Marek Belka, stated last week that the country needed to make this move.

Recently, Polish bonds have found support from foreign investors, as yields on Polish two-year notes fell to an almost three-week low. According to The Financial Times, citing the foreign exchange desk of Citigroup, since last week’s rate cuts, investors have been using some eastern European currencies as funding for carry trades. Some analysts, however, warn that the popularity of the Polish zloty and the Hungarian forint as high-yielding carry currencies could suffer. They say a period of lower interest rates amongst the eastern European bloc could thwart carry trades popular with currency investors as central banks seek to ease monetary policy further. John Normand, from forex strategy at JPMorgan, told the FT: “Investors prefer high, stable rates for carry trades rather than high, declining rates.”

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