The Polish zloty slipped from five week highs to trade in the 3.87-3.88 EUR/PLN range

The Polish zloty slipped from five week highs to trade in the 3.87-3.88 EUR/PLN range at the end of the session on Tuesday after bond markets and all other CE4 currencies took a hit from the better-than-expected IFO figure early in the morning and strong US data later in the day. By noon the first wave of selling was over and the zloty treaded sideways throughout most of the session. The rating perspective downgrade from S&P on Monday triggered an instant reaction from the PM Kazimierz Marcinkiewicz, who tried to calm markets in an interview for the Financial Times.

The prime minister assured that if formed the conservative-populist coalition would stick to the economic guidelines set by the current minority cabinet, including the budget deficit “anchor” (at PLN 30 bn.), fiscal stability and lowering taxes - Marcinkiewicz himself together with FinMin Zyta Gilowska would safeguard such a policy. This is hardly new wording from the PM and as we have said before, as long as Gilowska (and probably also Marcinkiewicz) is in office markets will remain fairly confident on Poland’s fiscal outlook.

However at the moment it’s hard to say whether that the FinMin will even survive long enough to see the 2007 budget passed on to the Sejm later this year. We uphold our view that her resignation is one of the key risk factors for the zloty in the medium run. Just before the closing the zloty fell victim to the stronger-than-expected US data on business confidence and house sales and eventually dropped back to the 3.88 EUR/PLN area. The data on retail sales, the MPC communiqué and inflation report will be the key points of interest for traders on the domestic front today (more on this in the fixed income part). In this respect the zloty should look for inspiration from the domestic bond market.

(CSOB - Investment research)