Zloty Strengthens Past Central Bank’s Intervention Trigger Point

Bundles of 100 zloty banknotes. Photographer: Bartek Sadowski/Bloomberg
Bundles of 100 zloty banknotes. Photographer: Bartek Sadowski/Bloomberg

(Bloomberg) -- The zloty extended gains, breaching a threshold seen as a possible trigger-point for central bank intervention.

The Polish currency appreciated as much as 0.6% on Thursday to trade below 4.50 per euro, a level that prompted the central bank’s most recent foreign-currency purchases aimed at stemming the gains.

The zloty has rallied almost 4% versus the euro since the end of October, with the first reported intervention on Dec. 18. Policy makers’ efforts to curb that strength contributed to the currency’s biggest annual retreat in almost a decade.

Governor Adam Glapinski had deemed the zloty’s advance “very harmful” and confirmed the Polish central bank has been intervening since mid-December. He also flagged a further rate cut may be in the cards this quarter, even though the current, record-low reference rate of 0.1% was “appropriate and best suits the situation.”

While the official line is that the depreciation is aimed at helping Poland’s economy and the country’s exporters, some analysts see a fiscal motive behind it. The monetary authority may have been trying to inflate the year-end value of its foreign reserves when counted in zloty. That would help drive up its profit and plug a hole in the government’s 2021 budget.

“The National Bank of Poland will try to prevent euro-zloty from returning to its pre-intervention levels in early 2021 to demonstrate a credible commitment to supporting economic recovery via a weaker currency,” Marek Drimal, a London-based strategist at Societe Generale SA, said in a note on Wednesday before the level was breached. “As the recovery gains pace, which may be likely from the second quarter of 2021, we expect the NBP will cease its activity on the currency market.”

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