The Polish zloty inched up by 0.2% against the euro on Tuesday

The Polish zloty inched up by 0.2% against the euro on Tuesday following the fairly strong start of the session across emerging markets. The EUR/PLN pair quickly settled into yet another extremely tight range in the 3.9050 area, unmoved by politics which provided the market with a dose of surprise. This time, the far-right LPR announced that it would form an informal parliamentary alliance with the leftist Self-Defence, and by doing this it stepped up the tone in the ongoing coalition negotiations with the conservatives.

Both populist parties see that the PiS has become less inclined toward earlier elections (after PM Jaroslaw Kaczynski came out yesterday morning and stressed that he saw no need for a snap poll) and clearly hope that by joining forces they can work out a stronger bargaining position. Nonetheless the agreement changes little in terms of the immediate political outlook – the PiS would have to come to terms with both former partners if the old government coalition were to be revived, and the LPR-SD deal may even simplify the negotiations.

Late in the evening FinMin Zyta Gilowska came out with a cautionary statement in which she stressed that the prolonged political turmoil could undermine the Polish economy and may hurt investor confidence. The ongoing rows and constant lack of stability could threaten reforms and plans of fiscal consolidation, especially if growth moderates in the years to come, and could even lead Poland closer to the Hungarian scenario. This is the typically strong wording we would expect from Gilowska, who is seen as the main reformatory force in the current government, so a significant (negative) reaction to the warning from the zloty seems unlikely.

The market has become desperate for volatility. More importantly, we are skeptical on whether politics can provide the needed impulse for the zloty to break out of the tight and quiet range trade. Of course a failed vote of confidence and hence pre-term elections would trigger selling in the short term, but the losses would most likely be limited for reasons we have discussed repeatedly before. We should see more uninspired sideways movement from the EUR/PLN pair somewhere in the area above 3.90 EUR/PLN today.

(CSOB - Investment research)