We have seen the USD fall back on the PLN and we are now looking for the USD to firm up and move to the upside – logic of our view is outlined below.
Reasons for PLN Strength Mostly Broad USD Weakness
The PLN has done well against the USD on the view that the Fed will turn dovish and cut rates twice this year with the first cut coming in November which has caused a general USD sell off.
The Zloty is a high BETA currency and tends to out perform other majors in times of general USD weakness but the move is now overdone and we expect the USD to stabilize and move higher.
PLN Euro Correlation
The PLN is correlated with the EUR and the market is generally bullish of the eurozone economy which is not supported by the data. The market also doesn't see a dovish ECB and is looking for only two cuts this year. We dont share the optimism about the eurozone economy and think the ECB will cut rates to spur economic growth with at least 3 cuts this year.
Most market forecasters and investors are not worried about the elections in France and see them as a non event which it isnt polotical deadlock in a country with debts over 100% of GDP is a majro problem - we cover this subject in more detail in the article we wrote before this one.
Also we have seen generally weak Polish economic data and the economy will slow further as eurozone its major trading partner slows up.
Russia Ukraine Conflict
This is a “wildcard” which most forecasters are bit taking seriously in terms of impacting on the PLN but could cause significant volatility in USD/PLN. Poland has been one of Ukraine's biggest supporters and has talked about possibly committing troops to the conflict, hosting F-16 fighters and using its air defences to shoot down Russian missiles over Ukraine. Tensions are high between Warsaw and Moscow and if they boil over which is possible the Zloty will sell off hard.
Technical Analysis
Technically we are now oversold and expect a rally back to the upside. Our view of the key levels of support and resistance to look out for are below.
