The Polish zloty extended losses on Wednesday in-line with all other regional currencies struggling to regain its footing after last week's EBC decision on rates and hawkish statements by Fed representatives that fueled expectations of more global monetary tightening. Additionally domestic politics weighed down sentiment in the region. Early in the morning Andrzej Slawinski pointed out that ever since the zloty became popular among foreign hedge funds it’s volatility increased dramatically. He added that the Polish FX market is deep enough to absorb flows from these funds, but at it is too shallow to reduce rate fluctuations they create. In the meantime foreign players continued their withdrawal from emerging markets right from the start of trade, with the weak PLN underpinning bids all around the region.
The first large move of the day took place early in the morning and saw the zloty hit fresh two month low as against the euro, while the next wave of PLN selling pushed the EUR/PLN pair up to the 3.9 area i.e. to the highest level since early December. The battle over the Pekao S.A. and BPH merger fought in the background did little to help the zloty but was all in all largely ignored by the market. The zloty shrugged off the news that the European Commision accused Poland of breaking the EU’s internal market and competition rules and launched a legal campaign in support of the merger. From our perspective the final decision about the merge will have little influence on the market sentiment. On the economic front there is little to look out for today, hence the balance between the global appetite for high yielding currencies and interest from exporters will remain the key to determining the direction of market flows. We see some room for the zloty to weaken today, although in the short run stronger resistance can be expected at 3.91 EUR/PLN while 4.00 EUR/PLN should cap the losses in the longer term perspective.