Polish zloty in choppy trading, rate decision tomorrow

It was a choppy week’s trading between sterling and Polish zloty last week, with economic releases first weakening and then strengthening the Polish currency. Polish producer prices figures released on Friday revealed a worse-than-expected rise in the annual rate by 3.7% in May, down from April’s revised 4.8% rise. This prompted a weakening in the zloty, however industrial output figures released the same day gave it a boost after they revealed a slowing in the pace of decline in the sector. Industrial output in May fell by an annual rate of 5.2%, which is slower than a revised 12.2% year-on-year decline in April, according to figures released by the Polish government. The zloty’s rally was further aided yesterday following a positive inflation figure, excluding food and energy prices, which showed a rise to 2.8% on the year in May from 2.6% in April. This figure was slightly above the forecasted figure of 2.7%. Attention has now turned to tomorrow’s Polish interest rate decision, where most analysts are forecasting a rate cut to 3.50% following the fall in inflation.

Sterling gains against Polish zloty yesterday

Sterling has strengthened against the Polish zloty over the last week despite last month’s inflation figure coming in better-than-expected at 3.6%, down from 4% in April and below analyst’s predictions of 3.8%. This bolstered hopes of a Polish interest rate cut this month, following holds in April and May because of higher inflation and a weaker zloty. Yesterday, the Polish government approved a cautious 2010 budget outline which forecasted GDP growth of 0.5% and average annual inflation of 1%. Poland has suffered a sharp economic slowdown since Christmas, with GDP growth expected to reach just 0.2% this year, down sharply from 4.9% in 2008 but still better than most others in recession-ravaged eastern Europe. The 2010 Polish budget outline also envisaged unemployment to reach 13.8% by end-2010, up from around 11 percent now. All these factors combined, and the resulting speculation over how much money the Polish government will have to borrow next year, weighed on the zloty yesterday. Crucially, the centre-right government has not yet set the level of its 2010 budget deficit, which may prove critical for both Poland's eurozone entry ambitions and for the zloty and bond prices. In terms of the UK, improved sentiment surrounding its economy, prompted by more positive UK housing and industrial production data, has seen sterling gain against a basket of currencies recently, of which the Polish zloty is one.

Polish zloty finishes down vs. GBP last week, pars gains this week

The pound weakened against the Polish zloty last week as concerns over the UK’s political situation intensified. The prospect of disastrous results for Labour in the European and local elections prompted six ministerial resignations from Prime Minister Gordon Brown’s cabinet as he struggled to hold onto the party leadership. The local currency rarely benefits from political uncertainty, so disunity in the Labour Party weighed heavily on the pound late last week. The zloty’s gains were also extended after the Polish government announced its intention to lower the country's budget deficit once its economy starts to recover from a slowdown in growth. Poland's Prime Minister Donald Tusk announced last Thursday that he wants to avoid increasing taxes when reviewing the budget plan for 2009, saying he "doesn't expect the increased budget deficit will be too drastic. These are things we would like to avoid." This provided a welcome boost for investor looking at Polish assets and they responded by buying into the zloty. However, so far this week, the pound has recouped some of the losses it endured as the UK’s political situation looks to have stabilised. Strong gains on London equity markets recently have also improved investor sentiment in the UK’s chances of recovery.

Polish zloty nears all time low against the euro

The Polish zloty neared an all time low against the euro today over fears of souring currency options at Polish firms and rising concern about Eastern Europe's reliance on foreign debt.

Moody's rating agency said the accelerating recession in Eastern Europe will be more severe than elsewhere due to large imbalances, and it could threaten the ratings of local banks and their western parents. Banks from Austria, Italy, France, Belgium, Germany and Sweden account for 84 percent of all bank loans in Central and Eastern Europe.

Sentiment on the zloty has also been undermined by a Polish central bank report casting doubt on Warsaw's plans to adopt the euro in 2012 – since the report was published on Friday the zloty has fallen more than 8% to 4.9307 per euro, near the all-time low of 4.9453 reached in March 2004.