The central bank surprises as the złoty continues to rally
This week's key event was an MPC meeting. Markets broadly expected the central bank to leave the cost of money unchanged and bet the official monetary bias would be eased. The final decision came in on Friday and was in line with expectations, but the bias issue was surprising. The benchmark rate was kept on hold at 6.5 percent but the official bias was shifted from restrictive to easing. This decision had almost no impact on the złoty.
A cut in the cards
Markets expect the next move to be a rate cut, maybe even 50 basis points. However, during the week the central bank's governor, Leszek Balcerowicz, reiterated that the MPC focuses primarily on inflation targets. Does it mean investors should not expect prompt monetary easing? The answer is difficult. It is good to remember last year's controversial MPC decisions. However, investors are unlikely to retreat from Poland even if rates fall. Lower rates are positive for bonds and stocks. Strong fundamentals and privatization prospects should also have a positive influence on the Polish currency.
Reserve rethink?
On the international markets, the greenback suffered initially heavy losses but managed to regain on value during the week. The EUR/USD jumped to $1.3273 accelerated by new talks that central banks, particularly from Japan and South Korea, are likely to diversify their reserves in favor of currencies other than the dollar. Top officials from both institutions denied this but markets remained unconvinced. On the other hand, the greenback was supported by domestic macro data. Both the Conference Board's consumer confidence index and the US consumer price index were in line with investors' expectations and strengthened talks about further rate hikes. However, markets seem to doubt that more aggressive hikes will take place in the coming months and are prepared for gradual steps.
Giving ground
Investors mainly waited for US GDP data. On Friday it transpired that in fourth quarter in 2004, GDP grew at 3.8 percent. Although the result was a little above market expectations, the greenback had to give some ground.
Positive and negative factors weigh on the dollar. Strong growth and likely further monetary tightening make the greenback attractive to investors. However, markets have not forgotten about the twin deficits and their negative influence. Investors searched for balanced levels on EUR/USD. It seems that in the coming months, the R/USD will fluctuate in a range of $1.31-1.329.
Krzysztof Rup, Warsaw Investment Group (WGI)
A cut in the cards
Markets expect the next move to be a rate cut, maybe even 50 basis points. However, during the week the central bank's governor, Leszek Balcerowicz, reiterated that the MPC focuses primarily on inflation targets. Does it mean investors should not expect prompt monetary easing? The answer is difficult. It is good to remember last year's controversial MPC decisions. However, investors are unlikely to retreat from Poland even if rates fall. Lower rates are positive for bonds and stocks. Strong fundamentals and privatization prospects should also have a positive influence on the Polish currency.
Reserve rethink?
On the international markets, the greenback suffered initially heavy losses but managed to regain on value during the week. The EUR/USD jumped to $1.3273 accelerated by new talks that central banks, particularly from Japan and South Korea, are likely to diversify their reserves in favor of currencies other than the dollar. Top officials from both institutions denied this but markets remained unconvinced. On the other hand, the greenback was supported by domestic macro data. Both the Conference Board's consumer confidence index and the US consumer price index were in line with investors' expectations and strengthened talks about further rate hikes. However, markets seem to doubt that more aggressive hikes will take place in the coming months and are prepared for gradual steps.
Giving ground
Investors mainly waited for US GDP data. On Friday it transpired that in fourth quarter in 2004, GDP grew at 3.8 percent. Although the result was a little above market expectations, the greenback had to give some ground.
Positive and negative factors weigh on the dollar. Strong growth and likely further monetary tightening make the greenback attractive to investors. However, markets have not forgotten about the twin deficits and their negative influence. Investors searched for balanced levels on EUR/USD. It seems that in the coming months, the R/USD will fluctuate in a range of $1.31-1.329.
Krzysztof Rup, Warsaw Investment Group (WGI)
