Zloty Extends Gains as Indicator Shows Rally May Be Overdone

  • Currency is most overbought since April last year, RSI shows
  • `Big appreciation' probably over after 4.8% advance: Nomura

The zloty extended gains, climbing to the strongest level in more than two months, after the central bank signaled it would leave rates unchanged, while a relative-strength indicator showed future appreciation may be limited.

The currency strengthened 0.3 percent to 4.28 per euro at 4:35 p.m. in Warsaw, adding to Friday’s 1 percent rally after the central bank meeting. The zloty has rebounded from a four-year low reached after Poland’s shock downgrade by Standard & Poor’s on Jan. 15, making it the best-performer in developing Europe after the ruble and pushing the 14-day RSI to 34, near a level of 30 that some traders say indicates the euro is oversold against the Polish currency.

Governor Marek Belka said on Friday policy makers are still debating how to transition out of a year-long pause in changes to borrowing costs and it’s likely rates will stay in place for now. While the European Central Bank’s move to cut borrowing costs and deflation in Poland have boosted bets for a cut, new policy members appointed by the government have defied expectations, said Henrik Gullberg, a senior emerging-market strategist at Nomura International PLC in London.

“Initially there were great concerns about the new Monetary Policy Council, which have gradually dissipated, and last week there was further confirmation that its new members are not overly dovish,” Gullberg said. “The big appreciation move is close to being exhausted for now. We would probably take off zloty longs around 4.23-4.24.”

While officials from the Law & Justice party, which took power in a general election in October last year, had said they would appoint supporters of easy policy to the central bank’s rate-setting panel, so far most of the newcomers to the body have spoken against any quick cuts. 

The 10-member council’s decision to leave the seven-day reference rate at a record-low 1.5 percent matched the predictions of all but one of the 35 economists surveyed by Bloomberg. The central bank said deflation will continue in the coming quarters.

The zloty has been benefiting from “the continued unwinding of political risk,” according to Roxana Hulea, an emerging-market strategist at Societe Generale in London, who sees the zloty appreciating further to 4.25 per euro. “Here I mean persistent overestimation of the new board members’ dovishness and an expected change in the Polish central bank’s mantra of cautious, behind-the-curve policy making.”

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