USD/PLN hits fresh 19-month highs above 4.0800, Zloty weighed by weak euro, inflation concerns

• USD/PLN hit fresh 19-month highs on Monday above 4.0800 and is now up more than 3.0% since last Wednesday.
• A weaker euro, as well as inflation concerns and not as hawkish as hoped for NBP commentary, hurt the Zloty.

USD/PLN continued its recent bull run on Monday to hit fresh 19-month highs at 4.0800, where it trades higher by about 0.75% on the day. Broad euro weakness amid concerns about the state of the pandemic in mainland Europe and amid dovish ECB speak has exerted a heavy drag on the Central European currencies on Monday, though the Polish Zloty is the underperformer.

USD/PLN’s recent bull run was ignited last Wednesday in wake of hotter than expected US inflation numbers, which launched the pair above the psychological 4.00 level. Since then, it has barely looked back and is now up around 3.0% in the last four sessions.

Zloty woes

Unlike for the US dollar, hot Polish inflation has failed to give the Zloty any respite. The final version of Poland’s October Consumer Price Inflation (CPI) report was released on Monday and the YoY rate of CPI was left unchanged from the flash estimate at 6.8% as expected, up from 5.9% in September. That is nearly double the upper limit of the Polish Central Bank’s 3.5% inflation target (the bank targets 2.5% plus or minus 1.0%).

The October inflation figures thus put heavy pressure on the Polish Central Bank to quicken the pace of their hiking cycle. That's because the inflation spike has sent short-term Polish real yields into deeply negative territory - at roughly 2.4%, the Polish Government’s 1-year bond yield has a negative yield of 4.4% to the current YoY rate of inflation. This not only constitutes a drastic, unnecessary easing of financial conditions but also puts pressure on the Zloty.

The Polish Central Bank (called the Narodowy Bank Polski or NBP), hiked rates by 75bps to 1.25% earlier in the month, but the failure of the Zloty strengthen suggests markets think this is far from enough. NBP Governor Adam Glapinski, speaking in the Polish press, said that further rate hikes are more likely than not. But he said that this was “a conditional probability” and “it may change”, or in other words, there is a chance the bank might still hold rates at its next meeting. The Zloty seems to have reacted poorly to this dovishness.

Looking ahead, USD/PLN will continue to track movements in EUR/USD as focus shifts to state-side events, including US Retail Sales, Fed speak and the potential announcement of who is going to be the Fed’s next chair.