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Zloty Drops After Rate-Rise Bets Spark Best Week Gain Since May

Polish ZLoty
Bundles of fifty zloty notes sit on a counting table at the National Bank of Poland's sorting facility in Warsaw, Poland, on Friday, Dec. 31,2010. Photographer: John Guillemin/Bloomberg

Jan. 7 (Bloomberg) -- The zloty retreated, snapping its longest winning streak since November, as a technical indicator signaled the Polish currency was overbought after appreciating to a nine-month high on interest-rate increase speculation.

The zloty depreciated 0.3 percent to 3.8739 per euro as of 4:30 a.m. in Warsaw, ending a five-day rally, its most extended since Nov. 4. The currency is still up 2.3 percent in the past five days, its biggest weekly gain versus the euro since May 14.

The 14-day relative strength index for the zloty rose to 72.7 yesterday, a second day above the 70 level that signals an asset is due for a decline. The RSI identifies possible turning points in indexes or securities by measuring the degree that gains and losses outpace each other in a given time period. The RSI was 69.5 as of the close of trading today.

“We are pausing a little after a strong rally we saw this week,” Nigel Rendell, senior emerging-market strategist at RBC Capital, said by phone from London. “We have scope to go further as policy makers are clearly giving a green light for zloty appreciation.” An exchange rate of 3.80 per euro is “the next level to watch,” he said.

The zloty’s rally this week was sparked by a Finance Ministry estimate Jan. 3 that the annual inflation rate quickened to 3.1 percent in December, surpassing the central bank’s 2.5 percent target. Central bank Governor Marek Belka was reported as saying on Jan. 4 that rate setters should move “preemptively” to curb inflation.

Forwards

Investors in interest rate derivatives are now betting that the central bank will lift the main rate at its meeting on Jan. 19 after keeping it at record low 3.5 percent for 18 months. One-month forward-rate agreements, contracts used by investors to bet on changes in interest rates, rose 13 basis points to 4.20 percent this week. The contracts are trading 25 basis points above the three-month Warsaw Interbank Offered Rate at 3.95 percent.

“After talking the talk, they will now have to move as early as this month,” RBC’s Rendell said. He predicts the main rate will rise by a total of 75 basis points in the next six to nine months.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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