Market Summary by AFORTI: single-digit inflation, MPC decision, situation on the currency market

The last few days have brought us very strong market fluctuations in the Polish zloty. The reasons are mainly politics and uncertainty related to quite chaotic moves by the government and the National Bank of Poland. So what can we say about the current situation? Let's start, of course, by looking at fundamental data. The Central Statistical Office reported that inflation dropped to 8.2% year on year, and compared to the previous month, prices decreased by 0.4%.

Is this really a reason for optimism? In our opinion, before the elections, we are dealing with manipulation of the index, mainly by significantly lowering fuel prices - and thus artificially hiding inflation around 2% (percentage points). Fuel prices in Poland contradict any market realities and it is clear that such a situation is only intended to have a positive impact on the ruling party's ratings. It is no coincidence that Orlen, controlled by the State Treasury, has previously made extraordinary profits and created a financial cushion just to use these funds before the elections and implement the government's policy. Unfortunately, this is a very short-sighted action and although approximately 70-80% of fuel demand is covered by domestic production, import is still necessary - at free market prices. Additionally, it should be noted that the implementation of the "election sausage" in the form of artificially lowering fuel prices - is carried out from strategic reserves. And this is a very dangerous precedent and the elections should not be a justification for it. 

Of course, the question immediately arises - how this can translate into the markets. Artificially low inflation will probably give the President of the NBP arguments for another rate cut. It probably won't be 75bps, but rather 50 or 25 basis points. Unfortunately, in the current situation and the surprising actions of the Monetary Policy Council/NBP, it is difficult to say which option is more likely - that is why we will bet 50/50. The consequence of this bet is the question - how will the currency market react to it? After the previous decision of the Monetary Policy Council and the conference of the President of the National Bank of Poland, which many people treat as an exception, the zloty lost even 15 percent at times - even reaching EUR/PLN 4.6900. Despite the National Bank of Poland's assurances that this was not something to worry about, several interventions in the market and a significant influence of currencies were visible, which were intended to calm down the situation. In fact, the zloty did not weaken above EUR/PLN 4.7000, but on the other hand it did not have the strength to return below 4.6000. The repeated hitting of the market with amounts of EUR 200-500 million by the National Bank of Poland only strengthened the zloty for a short time. However, the EUR/PLN level of 4.6000 poses such strong resistance that when approaching this level, importers immediately appear with demand for foreign currencies.

From the point of view of the Polish market, the next meeting of the Monetary Policy Council and the decision that will be made there (October 4 at 5:00 p.m.) will be crucial. Unfortunately, the ruling camp has a strong political influence on the economy, which may translate into not very rational decisions. When interest rates drop, investments in Polish debt securities will become unprofitable and risky. With slightly different interest rates on German "bunds" and American "T-notes/T-bills", they provide a much lower level of risk and a certain and constant rate of return. Translating this into the language of the currency market - sale of Polish debt securities = demand for foreign currencies. That means further movements north. The Polish zloty has certainly not been one of investors' favorite currencies lately.

Our view of the EUR/PLN market is the resistance level of 4.6280 - with attempts to break 4.6000. This is just waiting for the MPC/NBP meeting. After the decision we expect (25/50bps £) - a quick move to the area of ​​4.6800/4.6900 is very likely.

Let's also take a quick look at the dollar. Here we have a significant impact of the EUR/USD relationship and the dollar, which was supposed to slow down against the zloty around USD/PLN 4.3800, broke below the level of 4.4150. The American currency in relation to the Polish zloty translates its movement into the balance between Europe and the United States. Since the market looks more at our trade in EUR, the dollar is clearly more susceptible to fluctuations and absorbs the movements of the currencies of two continents. So can we expect further weakening of the zloty against the dollar? Yes, in the case of interest rate movement - 4-5 worse weakening is very real. Therefore, we can move to a level closer to USD/PLN 4.4650. But again – we are waiting for the Monetary Policy Council/NBP. Without this, it is impossible to make any judgments at this time.

Looking at EUR/USD, of course we have to go back to the FED's decision. Our expectations and playing against the market consensus did not come true and the FED ended the cycle of increases. This means that a more likely scenario for 2024 is only three cuts of 25bps than the previously assumed 4.

So will EUR/USD reach below 1.0380? Currently, the EUR is clearly gaining and gaining value against the dollar, but this move seems to have limits and 1.0400 should block the EUR/USD move down.

Let's also briefly summarize what's happening on the stock exchange. Investment capital is still cautious and the WIG 64,000 level attracts like a magnet. Large companies also do not arouse investor interest and the WIG 20 - 2,000 level is a thing of the past. In our opinion, the election period will be crucial - it will provide an answer as to whether the investment risk is justified.

Szymon Jańczak

Dyrektor Departamentu Skarbu

AFORTI Exchange SA