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Another week went by, as the zloty – tormented by sentiment about volatile geopolitical risks – quickly moved from consolidation (a decrease in fears) to depreciation (a rise in fears of conflict). The EUR/PLN exchange rate moved in the range of 4.48 (ie the 8-month minimum) to around 4.54, when investors were limiting risky investment positions before the weekend.
Other currencies in Central and Eastern Europe were also volatile, but for example the Czech koruna – unlike the aforementioned zloty, but also the Hungarian forint – managed to strengthen last week due to its low dependence on Russian oil imports. On the other hand, the recent days in the Eurodollar market have been quite calm. The EUR/USD exchange rate is centered around 1.1350, awaiting developments in geopolitical events. The EUR/CHF was the exchange rate that responded most strongly to changes in geopolitical risks. And due to the escalation of tensions, the price fell to the level of 1.0450.
Our predictions for next week
US dollar / Polish zloty
The expected stabilization of the zloty, combined with lower volatility in the euro-dollar, will lead to the fact that the PZD/USD pair will calm down – provided there is no significant escalation of military tension -. You will expect the development of the geopolitical situation in the world, and most of all the meeting of Putin and Biden.
Euro / Polish zloty
The zloty is dominated by a possible escalation of geopolitical tensions. The growing threat of armed conflict determines the preservation of risky assets, especially – at the regional level – the Polish zloty. However, it is difficult to determine the end of geopolitical tensions. However, we still take the gradual de-escalation scenario as the base case.
In such an environment, the EUR/PLN price will try to fall below the level of 4.50. However, to be able to talk about such a scenario with greater probability, the diplomatic track must be reused. The promise of a return to Russian-French-German talks remains an opportunity. Until it is exceeded, the zloty may remain near the 4.52 level against the euro with a desire to attack the lower levels.
Refusal of the diplomatic track or failure of negotiations should quickly push the EUR/PLN rate towards 4.56 and above. Therefore, we have a week of potential volatility and a secondary role to macroeconomic factors.
Last week was a time of strong declines in local government bond yields. The short end of the curve, driven by shifting expectations regarding Poland’s low interest rate trajectory, dropped the yield by 16 basis points to 3.64%. Investors, although they are still aggressive in their expectations regarding the reference rate this year (4.50%), are more clearly evaluating its declines at the beginning of 2023.
The 10-year yield fell 19 basis points to 3.92%, following core markets, although it struggled for part of the past week to stay above the 4% barrier. As mentioned, the underlying markets also experienced an influx of capital at that time, which must correlate with a persistent level of risk aversion. German 10-year bond yields fell 7 basis points to 0.21% and the corresponding US debt yield fell 6 basis points to 1.93%.