Market Summary by AFORTI: The Polish zloty experienced significant fluctuations last week due to the situation in the Middle East and changes in the EUR/USD exchange rate. The consumer inflation rate in Poland was 2.0%.

22 April 2024

The past week in Poland has passed us by in the shadow of very high turbulence on the zloty and on the capital markets. However, let us perhaps start with macroeconomic data. On Monday, we learned the final reading of CPI (consumer inflation) data. While the earlier preliminary month-on-month reading was accurate at 0.2% m/m (for March), the year-on-year reading differed by 0.1 percentage points. Recall - the preliminary data spoke of inflation falling to 1.9%, while the final figure was 2.0%. This is undoubtedly the lowest value we will face this year. The April data will already be burdened by an increase in the price of foodstuffs, on which a 5 per cent VAT applies from 1/04/2024. Initial analyses assumed an increase in inflation of around 1.1-1.2 percentage points, but there is a noticeable 'cushion' to mitigate this increase. This is mainly due to the battle we mentioned earlier between the major retail chains, which have decided to market themselves with the slogan that the VAT change will have no impact on prices. This is, of course, a short-term strategy and customers, who will gradually become accustomed to the new (de facto previous) rates, will stop paying so much attention to the price increase resulting from this abrupt change. This will certainly be helped by the spring-summer period, when prices for fresh fruit and vegetables fall quite sharply. For the time being, we have not had any major turbulence to suggest that there may be increased shortages in the assortment. Of course, one can talk, about the weather, which has gone from strongly summer temperatures, back to those closer to winter, but in the perspective of April, such changes were never something surprising. Turning to inflation, the underlying annualised value was confirmed at 4.6%.

The global economy was strongly influenced by the conflict in the Middle East. We have seen quite a bit of turbulence in the currency markets. To begin with, a few words about the macroeconomy. On Monday, we learnt about US retail sales (Retail sales) on a month-on-month basis. Two indicators - the first one 'Retail Sales' surprised positively, as instead of the expected 0.4% growth, we saw a growth value of 0.7%. After a good February, with 0.9%, a fall to 0.4% would indicate a strong decline in enthusiasm in consumer attitudes. However, this value gives a signal that retail sales are doing quite well. The second of the "Core Retail Sales" indicators, is the "Retail Sales" indicator adjusted for car sales. Here we had an even more positive surprise. The forecast of 0.5% vs. 0.6% in February surprised all analysts - and the value rose by 1.1%. This further confirms that consumer demand is clearly doing well and the US economy is not slowing down.

FED chief Jerome Powell spoke on Tuesday. The tone of his speech, as well as that of other Fed members, clearly suggested that the cost of money would remain unchanged in the near term. There were, of course, some discrepancies between the Fed members - mainly regarding the dates of potential first interest rate cuts. A statement by one of them - R.Bostic - even made it clear that he would vote not to cut rates this year. However, we will remain convinced that there is still a chance of 2 cuts of 25 basis points each - in Q4 2024. Of course, we will be keeping a close eye on the market and on further data that may influence the Fed's decision-making.

Returning to the situation in the Middle East, which began on Friday 12 April. Markets reacted nervously by fleeing into safe-haven assets, while at the same time the EUR/USD exchange rate corrected strongly. As we had a weekend, we saw more volatility after the markets opened on Monday. This is because statements by Israeli authorities suggested the possibility of a retaliatory attack on military targets - mainly in Iran. The retreat from the escalation of the conflict by the countries that attacked Israel caused optimism to return to the markets, and investors felt that there should be no further flight from profitable assets.

It is now worth taking a look at how the zloty has behaved in this whole situation. In our market we had an exceptionally jittery market, which, in addition to the events in the Middle East, was compounded by strong EUR/USD movements. The zloty, which on Friday 12/04 was still quoted at EUR/PLN 4.2650, started to successively lose and after the opening on Monday - within 2 days - weakened to the area of 4.3750. Analysts could not find any rational explanation for such dislocation and panic, so it became quite clear that the use of increased market volatility could serve both the better valuation of assets denominated in foreign currencies and could also partially coincide with the inflow of KPO funds. This was the largest inflow on record - equivalent to around PLN 27 billion. Certainly, it is difficult to expect the entire EUR 6 billion to flow through the market, but even the part realised at a higher exchange rate is a significant difference with such amounts. Of course, these are some considerations and looking for explanations for such significant volatility on the PLN. Especially as other European markets did not record such volatility on the currency market. The zloty, despite an initial mid-week correction, returned to EUR/PLN 4.3700 on the night of 18/19.04, but recovered successively after the opening of the day - ending the week around the EUR/PLN 4.3150-4.3200 levels. Should we therefore expect further strengthening of our currency this week? Everything seems to indicate that the markets quickly dealt with geopolitical information about the conflict, and such information disappears rather quickly and is replaced by the most up-to-date information appearing on a daily basis. In our opinion, it is worth watching in the coming days to see whether such a sharp move will be offset and EUR/PLN will once again hover in the EUR/PLN 4.2500-4.3000 corridor.

EUR/PLN - perspective on the last 10 days

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Looking at the US currency, volatility against the zloty has been very strong, . Since 10/04, the zloty has lost an equal 20 cents to the US dollar! The dollar registered very high volatility against the zloty, which, in addition to the aforementioned flight from the Polish currency, was reinforced by strong EUR/USD fluctuations. The zloty, which only 10 days ago was valued at USD/PLN 3.9125, reacted to the events in the Middle East by "rallying" to the vicinity of almost USD/PLN 4.1200. Such a movement within a few days would happen in the case of critical market information, suggesting a serious crisis, but not in the face of the situation in the Middle East, which does not have such an impact on the Polish market. All in all, a comparison with the situation last year, when the Monetary Policy Council surprised the market with the scale of the interest rate cut, may come to mind.

As with EUR/PLN, the zloty corrected rather tentatively. At first we had a correction resulting from the EUR/USD move, but then the 18/19 overnight correction pushed USD/PLN up again to almost 4.1200. Friday's correction was strong, however, and we ended the week below USD/PLN 4.0500. A similar question is asked here: is there a chance for the zloty quoted against the dollar to see "front three" levels soon? Here the situation is a little more complex, through the negative correlation of EUR/USD on USD/PLN. This is because a weakening dollar will translate into a strengthening USD against the PLN. USD/PLN is therefore more likely to be expected in the 4.0200-4.0500 corridor than USD 3.9700-4.0000.

USD/PLN in the perspective of the last 2 weeks

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The EUR/USD quotes referred to earlier have shown great volatility over the past week. The dollar, which just 10 days ago was oscillating around EUR/USD 1.0755, started to lose sharply due to the situation in the Middle East. The previous weekend's change ended around EUR/USD 1.0630. The beginning of the week, after a slight rebound, deepened the weakening in the afternoon and on Tuesday we saw the rate touching USD/EUR 1.0600. Monday's data reporting very good retail sales influenced statements by Fed members, who still see an inflationary threat in a rather heated economy. EUR/USD made a final attempt to bounce towards 1.0700 on Friday, but eventually the dollar started to lose again - heading towards strong support at EUR/USD 1.0600. Will the attempt at a third attack in recent times prove successful? It is worth keeping an eye on macroeconomic data from the US, which are nevertheless likely to strengthen the dollar.

EUR/USD in the perspective of the last 10 days

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EUR/USD in the perspective of the last 30 days

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In the context of the Middle East conflict, let's look at how oil prices have behaved. Recently, analysts expected an upward trend to break the strong 'ceiling' of USD 100/barrel. However, oil failed to reach USD 93 and entered a sideways trend of USD 90-91.30/barrel. A temporary price spike towards USD 92.50 was quickly neutralised and oil was again quoted in the aforementioned corridor. The end of the week brought increased volatility. Oil, which had cheapened to USD 87.00/barrel, surged back to USD 90, only to flash back to the starting level. The strong short term speculation on oil prices was eventually put to rest and prices calmed down around USD 87.50/barrel. Will the downward trend continue? It is difficult to answer this unequivocally at the moment, especially in the context of the nevertheless uncertain situation in the Middle East.

BRENT crude oil - last month USD/barrel

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Gold - has been attracting the attention of investors for quite some time, registering successive record highs. After reaching the strong USD 2,400/ounce resistance and a brief speculative breakout to USD 2,430, the gold price is consolidating around the vicinity of this next psychological boundary. Admittedly, we have had to deal with temporary nervousness following news of an escalation of the conflict in the Middle East. In the long term, however, it looks like the upward trend will continue. We are even talking about a price close to USD 2,700/unit.

Gold - last 2 months USD/ounce

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Finally, a brief look at our stock market. Like other markets - the stock market reacted with falls immediately after the escalation of the conflict in the Middle East. The WIG 84,000 level remains strong resistance and investors are clearly waiting for the situation to calm down. The WIG 20 is also gathering strength before breaking through the 2,500 resistance again - but as for the WIG - investors remain cautious before entering listed company assets.

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Szymon Jańczak

Director of Treasury Department

Aforti BIZ

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