The favourable developments in global market at last made Polish zloty recover. Thus, the third time this year we saw withdrawal from the level of 4.50 zloty per euro. Key events in December are still ahead of us, including the ECB decision tomorrow.
Echoes of the Italian referendum on financial markets have passed very quickly, which shifted market’s attention to ECB meeting and helped to improve sentiment. After recent fears on European equity markets we see no trace – German DAX30 index overcame strong resistance zone and started following Wall Street reaching the highest level this year. In such circumstances, PLN may finally take a deep breath and take advantage of the favourable Friday’s decision of S & P, which raised rating outlook from negative to stable. The effect of this decision is evident in the bond market, where yields on 10-year securities fell from 3.83 to 3.58%, and the difference in terms of profitability of German 10-year-old is the lowest since mid-November, when the EURPLN fluctuated around 4.40.
It is true that agency in an additional comment to the decision warned that higher tax collection is not sufficient to cover additional costs of social programs, but also added that unless the deficit in 2017 will be higher than predicted by S & P (3.1% of GDP, the government sees 2.9%), the rating will not be lowered. In this situation PLN had no choice but take advantage of the improvement in sentiment in European markets. We see potential for a decline of EURPLN in short term if on the way does not stand decision of European Central Bank.
ECB meeting will be held tomorrow and provided that the Bank will not change the policy parameters, the key is communication. Part of the programs of the Bank, the purchase of bonds on top, expires in March, and is widely expected announcement to extend them for at least 6 months already this week. The behaviour of the markets, especially the German market share, suggests that another option is not taken into account. Meanwhile, the ECB will have a hard nut to crack. The data indicate improvement of the economic situation, the inflation target becomes likely more tangible, and purchase of bonds cannot be carried out at the current rate for a long period. If president Mario Draghi will announce even a small reduction of program it would be met with nervous reaction of markets and would apply to PLN.
Against this background, the Polish MPC’s (Rada Polityki Pieniężnej) decision does not really matter. The market does not expect any change in interest rates in the foreseeable future. Gold benefits from good moods Euro costs 4.4544 PLN Dollar 4.1533 PLN Swiss Franc 4.1158, while the British pound 5.2465 PLN
dr Przemyslaw Kwiecien