Polish polarization does not hurt zloty

The victory of conservative Karol Nawrocki in the Polish presidential election has left the zloty remarkably cold. However, it could well be that the result will have a long-term effect on the currency world.

Apart from interest rate movements, few events have such a strong impact on currency markets as elections. After Donald Trump's election victory last year, for example, the dollar shot up by almost 2% in a few hours. In early May, a victory by a far-right candidate in the first round of the Romanian presidential election prompted the lei's biggest fall in more than five years. Incidentally, this damage was largely recovered two weeks later when the moderate Nicusor Dan won a majority in the decisive round. Viewed in this light, it is quite remarkable that the zloty barely moved after Nawrocki won the Polish presidential election.

Narrow victory
On Monday it was announced that Nawrocki had won 50,9% of the votes. That is slightly more than the 49,1% for Rafal Trzaskowski as candidate of the incumbent coalition. Nawrocki will set a conservative course. He is quite critical of LGBTI rights, an outspoken opponent of abortion and opposes the influence of Brussels in Poland. Nawrocki's arrival makes it a lot more difficult for the incumbent government of Donald Tusk to implement reforms. In Poland, the prime minister has the right of veto, so he can block new legislation. Tusk has already announced that he will request a vote of confidence. That would be a clear signal that the reform course will be continued after all.

Economy growing strongly
Although the presidential election could have major political consequences, the zloty's exchange rate movement was limited to a decline of less than 0,5%. An important reason for this lackluster reaction is that many parties had already built up positions to hedge against a scenario in which Nawrocki would emerge victorious. In addition, Poland is doing well economically. Thanks to rising wages, higher consumer spending and infrastructure projects partly financed by the EU, the economy is growing by almost 3,5% this year. For the time being, Nawrocki's victory does not seem to change the positive economic picture.

Central bankers wait
The third factor why the zloty is marking time is that the currency is profiting from high interest rates for the time being. The policy rate is currently 5,25%. Although inflation has fallen from 4,9% to 4,3% in recent months, the Narodowy Bank Polski (NBP) is not rushing to cut interest rates for the time being. Incidentally, the central bankers are meeting tomorrow. There is a good chance that the interest rate will not be adjusted and that the NBP will wait and see how the political and economic situation develops for the time being. After a price increase of around 15% in just over two years, the zloty seems to be marking time for the time being.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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