The strengthening of the US dollar made some investors doubt the bright future of developing countries’ currencies, including the Polish zloty. USDPLN has started to rise, but is the growth temporary? Let us discuss the Forex outlook and make up a USDPLN trading plan.
Fundamental zloty forecast for six months
What is worse for a developing country’s currency: rising US Treasury yields or its own central bank’s dissatisfaction with currency’s excessively high rate? The zloty, which successfully started 2021, took a few steps back and lost all gains amid a rapid rally in the rates of the American debt market and the National Bank of Poland’s interventions. The President of the National Bank of Poland, Adam Glapinski, said that even though the current level of the main interest rate of 0.1% is most suitable for the economy, the central bank may reduce it in the first quarter.
The dovish stance came as a surprise to both investors and the Polish tax authorities. The latter have repeatedly expressed concern that lower borrowing costs will hurt the banking system’s profits and other interest-sensitive sectors of the economy and lead to a reduction in budget revenues. The National Bank needs to find a common language with the government and to establish communication. In particular, according to Citigroup, the volume of foreign exchange interventions in December amounted to $6.7 billion. At the same time, rumors circulate in the market that with their help, the central bank increased the value of gold and foreign exchange reserves at the end of the year and thus increased profits, which would then go to the budget.
The critical area for Adam Glapinski and his colleagues is 4.45-4.5 on EURPLN. This is not surprising. The lion’s share of Poland’s exports goes to the eurozone, and the strengthening of the zloty against the euro is an extremely undesirable thing for Polish companies operating in the foreign market. However, the National Bank can succeed at someone else’s expense. The rapid rise in US Treasury yields has pressed down all EM assets, including their currencies.
Poland and the United States dynamics of bond yields
Source: Trading Economics.
Encouraged by Joe Biden’s promise to invest trillions of dollars in the economy, investors began to rely on an increase in the emission of US Treasury bonds, dumping existing securities in the hope of acquiring new ones at auctions. As a result, the profitability is growing and the EM currencies promoted at the end of 2020 fell into disgrace for a while. I do not think that the rally in treasury rates will continue at the same speed as before. As history shows, if the main driver is the supply of debt, then the rise in yields is temporary. The pause will weaken the greenback and restore investors’ interest in EM assets.
Zloty looks like an attractive investment tool. The epidemiological situation in the country is better than in many European countries and the United States. The victory over the pandemic and the rapid growth of the eurozone’s GDP, Poland’s main trading partner, will catalyze the USDPLN trigger.
The number of COVID-19 infected per 100 thousand people
Source: Trading Economics.
USDPLN trading plan for six months
In my opinion, the current growth in treasury yields, as well as the associated strengthening of the US dollar and the weakening of emerging markets’ currencies, will be short-lived. In this regard, it makes sense to sell USDPLN on a rise to 3.785 or on a breakout of support at 3.693-3.698 with targets at 3.55 and 3.44.