Zloty Claws Back Earlier Losses, EUR/PLN Bears Target Recent Cyclical Lows

EUR/PLN (last at 4.4393) is back to neutral levels, giving away its earlier gains, with broad-based greenback weakness possibly supporting the recovering zloty. The pair hovers in close proximity to Jul 4 low of 4.4138 and a breach of that level would suggest that bearish impetus remains strong, while opening up the 4.40 round figure.

• While the past few weeks have seen EUR/PLN stabilise around its three-year lows, Poland's REER recently showed at its highest point since 2008 and remains close to these levels. The zloty has maintained its strength despite a dovish pivot in NBP rhetoric, which fanned bets on rate cuts already this year. A sustainably strong exchange rate supports disinflationary processes.
• A recent analysis contained in the NBP's report on monetary policy transmission showed that domestic (as opposed to global and regional) factors were responsible were responsible for just 18% of exchange-rate changes in 2000-2022. However, the report also showed that the role of the exchange-rate channel in monetary policy transmission is considerably larger than earlier estimated, which may feed into the imminent NBP debate on when to cut interest rates.
• Some of the zloty's gains this year come from strong fundamentals, which include the ongoing economic recovery, generally improving current account balance, and solid FDI inflows - these have all conspired to aid the zloty, even if the scale of its appreciation may have caught some off guard.
• On a more speculative note, there has been continuous talk of potential covert FX interventions. While the NBP currently has a relatively hands-off approach to FX matters, an unnamed analyst source recently told DGP that "one can see [state development fund] BGK in the market," seemingly acting as a vehicle for the conversion of some of the incoming EU funds, which may escape official statistics.