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Zloty ‘Significant’ Gains Unlikely on Euro Sales, HSBC Says

The zloty’s advance following the Polish government’s sales of euros may be limited due to the widening current account and budget deficits, HSBC Holdings Plc said today.

The Polish currency will probably struggle to appreciate beyond 3.85 per euro, Murat Toprak, London-based foreign currency strategist at HSBC, wrote in an e-mailed note to customers. The zloty has gained 1.9 percent this quarter versus the euro, the most among 10 emerging-market currencies tracked by Bloomberg in Europe, the Middle East and Africa region. It traded 0.8 percent weaker at 3.5939 as of 4:44 p.m. in Warsaw.

The zloty has rallied as the Finance Ministry said on April 21 that it will convert euros the government receives from the European Union on the market. The ministry has been selling the region’s common currency “regularly” since the announcement and will continue doing so “consistently,” Deputy Finance Minister Dominik Radziwill said last week.

Foreign-exchange “intervention policy will certainly protect the downside for the zloty but at the moment the upside potential is more questionable,” Toprak wrote in the note. “Over the coming three months, we believe that euro-zloty is likely to remain range-bound although the range might be tighter.”

The widening of Poland’s current-account deficit and deceleration in foreign-direct investments are “negative” for the zloty, according to HSBC. The balance of payments’ gap swelled to 1.38 billion euros ($1.9 billion) in March from 821 million euros a year earlier, central bank data showed last week.

‘Fairly Limited’

The budget deficit reached 7.9 percent of gross domestic product last year, the most since at least 1996, according to data compiled by Bloomberg. Room to maneuver on the spending side is “fairly limited” as Poland holds parliamentary elections in the second half of this year, HSBC said.

The government will this year exchange as much as 14 billion euros for the zloty, acting through state-owned Bank Gospodarstwa Krajowego SA, Radziwill wrote in a statement on April 21. The funds “represent a relatively significant amount” and selling them would have been positive for the zloty “in a favorable macroeconomic environment,” Toprak wrote.

The zloty has advanced as the central bank raised interest rates three times this year to stem accelerating inflation. Investors in the derivatives market are betting on two more increases by the end of the year. The spread between six-month forward-rate agreements and the three-month Warsaw interbank offered rate currently stands at 55 basis points, or 0.55 percentage point.

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