Currency report 2005: Starting strong and carrying on

The euro staged a recovery in March as EUR/USD hit $1.35. At the same time, EUR/PLN and USD/PLN dropped lower as the złoty strongly appreciated against the dollar. USD/PLN was quoted at zł.2.91, the lowest level since 1997. It seems obvious that the złoty's strength in basket terms was highly correlated with the EUR/USD movement.

Budget blues

As soon as the US currency began its move north, the złoty went into a correction phase. In May EUR/USD dropped below $1.30, lifting EUR/PLN to its highest level this year at zł.4.30. The euro under-performed because investors were afraid about the future of the EU. These fears were realized in June when both France and Holland rejected the European Constitution. The poor situation in the EU together with rising interest rates in the US caused the dollar to appreciate further. The positive sentiment for the dollar was also visible in Poland, where USD/PLN jumped above zł.3.42.

The vacation period helped the single currency appreciate against the dollar and złoty. Additionally, the Polish Finance Ministry decided to sell its euro for eurobonds, breaking the zł.4 level on the EUR/PLN chart. The złoty gained versus the greenback as well and at the beginning of September the dollar was at its lowest level since April. Unofficial interventions were also thought to have influenced the market in the third quarter.

Election fever

The end of August brought elections. Investors were closely watching the parliamentary race but no panic moves took place as surveys indicated a Civic Platform (PO) win, and the market was content to see the pro-reform party in the new government.

Surprisingly, Poles decided to hand power to Law and Justice (PiS). Although the initial move on EUR/PLN was up, the złoty managed to remain strong as investors were hoping that Donald Tusk, PO's candidate for president, would offset the PiS victory. The first-round results supported this thinking but the final result gave the Presidential Palace to Lech Kaczyński and forced investors to re-think their strategy.

Finally, the złoty lost ground against the euro and the dollar after PiS announced new reforms that will cost zł.12 billion. At the same time, the Polish market was also hit by forint depreciation after the Hungarian government decided to widen its deficit and postpone euro adoption. The złoty depreciation accelerated as PO and PiS failed to form a new coalition.

When PiS formed a minority government, the new Finance Minister Teresa Lubińska began her term of office with negative remarks about foreign investors, which also hit the złoty hard. Foreign investors were selling Polish bonds and buying euro in order to leave the country. EUR/PLN reached zł.4.04, the highest level since early September.

 

The final curtain

After the political storm was over, investors began to come back to the złoty, and the currency strengthened against both the euro and dollar. Investors were talking about possible Finance Ministry intervention, which was selling foreign currencies from bonds issued abroad. In the beginning of December EUR/PLN and USD/PLN dropped as the whole region appreciated in the wake of Slovakia's decision to join ERMII. As the year drew to a close, strong GDP data for Q3 in Poland and a EUR/USD correction from $1.17 to $1.20 brought EUR/PLN to a three-and-a-half-year low.

Maciej Chojnacki

WGI Dom Maklerski