On Wednesday, the Polish zloty settled back into calm range trading within in the technical barriers of EUR/PLN 3.7600-3.7850. Bond related flows pushed the pair down to the 3.77 area just after the opening. The zloty’s reaction was somewhat subdued though as investors stayed on the sidelines ahead of the 2Y OK0408 tender. An official report from the European Commission criticized Poland’s inability to meet the Maastricht budget criterion but it had no impact on the market. The Commission called Poland to reinforce the budgetary adjustments in 2006 and to improve long-term sustainability of public finances by more tight controls on expenditures. From the EC perspective, fiscal orthodoxy in Poland is insufficient to correct excessive deficits in 2007 or 2008. EU Commissioner Joacquin Almunia said he would ask Poland to decide on a euro entry target date, after setting a new deficit cutting path. The report partly blamed the political situation in Poland for its apparent inability to rein public finances. It was also said that the EU executive would initiate the block’s excessive deficit procedure against Poland.
With strong technical boundaries in place the zloty should remain range traded today. We still expect the FX market to closely follow the price action in Polish bonds. So, in case bond investors decide to take profit on recent gains, it also might cause a moderate correction in the PLN.
(CSOB - Investment research)