PLN/USD: Further Upside Expected

Back in August, the Polish zloty had been seeing continued downside against the greenback. More specifically, I made the argument that I expected this trend to continue due to an increasingly risk-off environment that does not favour emerging market currencies.

That said, we have seen a significant rebound in PLN/USD since the start of this month.

Source: Investing.com

Could this mark the beginning of an uptrend?

Domestically, Poland’s economy appears to be doing rather well. Recently, the World Bank raised the country’s growth forecast to 4.3%, up from a previously expected 4.0% - primarily being driven by a rise in domestic consumption and investment.

Moreover, in spite of continued low rates, inflation levels remain at 2.6%, which is significantly higher than the current rate of 1.40% for the euro area.

Source: Tradingeconomics.com

That said, what are the drivers behind this growth – and can we expect continued growth in the zloty to last?

Earlier this month, when a court ruling was passed that Polish home-buyers with mortgages in Swiss francs could now convert them to zloty-denominated mortgages – the fear was that the zloty would decline significantly – as this would substantially lower the value the Polish banks can ultimately collect on these mortgages.

However, this has not been the case and the currency has continued to rise.

Moreover, while Poland is not yet raising its rates, the current interest rate of 1.5% is still quite a bit higher than in the euro area, where rates stand at 0%.

Given the fact that we have been seeing a significant economic slowdown in Germany – the fact that Polish economic growth has continued is a highly encouraging signal – particularly given the trade links between the two countries.

With Poland’s GDP growth rate having reached 5.1% last year – and a significant portion of this having been driven by domestic consumption – Poland has been successful in reducing its dependence on trade to bolster its economy.

Ultimately, Poland’s economic performance in spite of macroeconomic pressures has frankly been quite impressive. After hitting a one-year low against the greenback earlier this month, I anticipate that this could be the start of a significant rebound for PLN/USD – with a target of the 0.26 level seen back in August being quite realistic in the next couple of months.

Disclosure:

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.