Polish zloty to strengthen to 4.24 against euro and to 3.75 against USD at end-2024 - PKO BP (opinion)
At the end of the fourth quarter of 2024, the EUR/PLN exchange rate will fall to 4.24 and USD/PLN to 3.75, with the EUR/USD rising to 1.13, PKO BP economists forecast. A key argument in favour of a strong zloty is the likely increase in interest rate disparity.
"The strengthening of the zloty will be supported by the prospects of accelerating Polish GDP growth in 2025 and a marked improvement in the interest rate differential between Poland and core markets," the bank's quarterly report said.
"We assume continued global risk appetite, favourable for the valuation of emerging market currencies, in view of the prospects for stable growth of the global economy in 2025 with a high probability of a simultaneous soft landing of the US economy," it added.
The authors expect the appreciation of the zloty to be hampered by growing expectations of the scale of interest rate cuts in Poland in 2025 and a deteriorating current account balance.
According to PKO BP economists, the key argument in favour of a strong zloty is the likely increase in the disparity of market interest rates as a result of the progressive normalisation of monetary policy in the eurozone and the US, while keeping Poland's central bank NBP rates at their current restrictive level.
"In the fourth quarter of 2024, we expect Fed and ECB interest rates to fall by 50 basis points. In addition, in the first half of 2025, we expect these rates to be cut by at least another 50 basis points, while in our view the MPC will not decide to resume monetary easing until March next year at the earliest," PKO BP experts assessed.
In turn, the economists' analysis of interest rate swap quotations indicates a progressive increase in the disparity of market interest rates as a result of the expected deeper decline in rates denominated in the euro than in the zloty.
"At the same time, the continuation of interest rate cut cycles in the fourth quarter of 2024 by the central banks of the Czech Republic and Hungary will premium the zloty among the currencies of the CEE region," they wrote.
"However, the MPC's increasingly dovish rhetoric, stemming from a softer inflation growth rate in the second half 2024 than Poland's central bank NBP's earlier projections, should increase the markets' valuation of the scale of Polish rate cuts next year, which will dampen the Polish currency's appreciation potential," they added.
According to economists, the prospects of a gradual recovery of the European economy in 2025, accompanied by a soft landing of the US economy, support an increase in the EUR/USD exchange rate.
"An analysis of the real interest rate spread between the US and the euro area in the coming quarters leads to the same conclusion, which should narrow as a result of the faster pace of Fed easing compared to the ECB, as priced in by the markets," they wrote.
As the authors of the publication point out, a risk factor for the projected exchange rates is the November US presidential election, which, due to the unpredictability of post-election economic and political scenarios, could lead to a significant increase in market volatility towards the end of the year, which would be an impetus for investors to shorten positions on risky assets.
"Additionally, one should keep in mind the risk of a sudden escalation of ongoing conflicts in Ukraine or the Middle East and an increase in the likelihood of a recession in the US next year, which could result in the relocation of capital from emerging market currencies, including the zloty to so-called safe havens such as the Swiss franc and the dollar," they wrote.
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