The Polish zloty traded in a narrow range against the euro in the 3.83 EUR/PLN area on Friday

The Polish zloty traded in a narrow range against the euro in the 3.83 EUR/PLN area on Friday, as investors carefully weighed the potential implications of conservative-populist program deal for the government’s economic policy.

At the moment the market seems to be downplaying most of the potential risk to public finance and the central bank’s independence associated with the newly founded “coalition” and we believe that solid economic fundamentals and continued rate cut expectations should keep financial markets away from a deeper correction in the near future. Of course, as long as the yet relatively harmless political talk is not followed by concrete action. In the longer term the zloty’s reaction will depend largely on whether the conservative-populist deal brings about the implementation of more populist policies or not. If so then we could very well see the EUR/PLN quickly edge up past 3.90 or even 4.00. As for today’s trading, and probably most of this week, given the zloty’s calm reaction to Thursday’s deal, we should see more range trade above the 3.80 EUR/PLN area as the market waits for the president’s final decision concerning snap elections. With the stabilization pact in place these have become significantly less likely though.

(CSOB - Investment research)