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Currencies: Nonprecedential zloty fall at Christmas

, author:

Marcin Lipka

During the Christmas week the zloty fell against the main currencies from 0.10 to 0.15 PLN. The euro tested the level of 4.40, the franc went over 3.65 and the pound came close to a 7-year high. What was the reason for such a dramatic sell-off of the Polish currency and what is to be expected on Monday?

Rapid zloty fall

The currency market can often surprise with unexpected changes or rapid movements. However, this situation during Christmas trade has never occured before. On Christmas Eve the euro was 4.30 PLN and on the 26th December the common currency cost 4.40 PLN. Similar situations occured with the franc, pound and dollar.


Annual EUR/PLN rate change. Source: Bloomberg

Chart Źródło: Bloomberg.

At the beginning it is worth mentioning that the last couple of days have lacked any significant events. Last week was free from economic data and the situation in geopolitics seemed stable. There were also no rapid changes observed on the forint, closely linked to the zloty. Movement of the Hungarian currency reflected the sleepy, holiday trade.

It could be assumed that recent events were a well-planned action of the short-term speculative capital which decided to sway the PLN rate and, using the market specificity, earn a lot of money thanks to destabilization.

An unfettered speculation

The operation began at least a week ago. Since then the Polish currency has noted losses every day. At first this could be explained by the rebound of the situation on the rouble, however, as the Russian currency made up for its losses, the zloty still failed to gain. The key day was Tuesday, when EUR/PLN went from 4.26 to 4.30. The analysis on Christmas Eve, pointed out that such strong a weakening on the zloty might result in either NBP (Polish Central Bank) or BGP (National Holding Bank) intervention, which have enough funds for preventing the rapid changes on the illiquid market.

However, neither of these institutions were concerned with the events of the Polish currency. This clearly encouraged the speculative capital and on Christmas Eve EUR/PLN went as high as 4.34. On Christmas Day the currency market was practically closed but not on the December 26th. The aggressive actions of the investors resulted in EUR/PLN testing the level of 4.40 at noon on December 26th. Adequate movements could be observed with CHF/PLN, GBP/PLN and USD/PLN, which reached the levels of respectively 3.66, 5.62 and 3.61.


EUR/PLN during the Christmas week

Chart Źródło: Bloomberg.

Monday session and conclusions

If the market does not come back to the levels of 4.30 per euro, it can be expected that the NBP will intervene. Its range will depend on the strength of the speculative capital and its particular goals. Currently it is hard to evaluate if the goal was to conduct a strategy on the spot market or an attempt to neutralize or activate the option structures. We may never know.

What is most amazing about this, is the attitude of the institution which should look after the stability of the currency. Throughout the years, actions of the NBP and BGP have reflected the situation on the market. They would limit the volatility, but not fight the trend. This resulted in the market 'knowing', assuming lack of some extraordinary events, that, the euro would probably stay within 3.90 to 4.30.

This particular kind of 'laziness' of the mentioned institutions might have been caused by small changes to methodology in calculating foreign debt and changes in social security, thanks to which the zloty rate ceased to be a burning issue at the end of the year. Let us hope, however, that the situation which was observed in the past few days will lead to some conclusions as such chaotic changes of the currency rate have hurt the whole economy.


This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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