Poland Buys Euros to Weaken Zloty, 1st Time in Decade

(Bloomberg) -- Poland’s central bank bought foreign currency to weaken the zloty for the first time since 1998 and said it may do so again, putting investors on notice it will seek to prevent exchange rate gains harming economic growth.

The zloty dropped as much as 1.2 percent against the euro, the biggest decline in two months, and traded 0.8 percent lower at 4:39 p.m. in Warsaw after the central bank said in an e-mail it had bought a “certain amount” of foreign currency around noon. The central bank probably bought between 50 million euros ($67 million) and 70 million euros, said Robert Narkowicz, a trader at PKO Bank Polski in Warsaw.

Policy makers are seeking to restrain the zloty after its biggest quarterly rally in six years drove the currency 6.4 percent higher against the euro in the first three months of 2010 as the only European Union economy to avoid a recession attracted investors. The central bank “can’t exclude intervening again,” Deputy Governor Witold Kozinski said by phone. The government may also buy foreign currency, Deputy Finance Minister Dominik Radziwill told PAP newswire.

“The best days of the zloty appreciation are probably behind us,” said Paul McNamara, who oversees $3 billion of emerging-market bonds and currencies at Augustus Asset Managers in London, a unit of Zurich-based money manager GAM Holding Ltd. “This is a very clear signal.”

Talking Down

Central bankers have been trying to talk down the zloty for more than a month on concern its strength may slow the economy’s expansion. Kozinski said yesterday there was a “positive climate for intervention.” Another deputy governor, Piotr Wiesiolek, said in a statement on March 11 that the central bank is operationally prepared to act.

Even after such talk, the move came as “quite a surprise” to investors, said Marcin Mazurek, an economist at BRE Bank SA in Warsaw. “I don’t know to what extent this is just the central bank demonstrating that it can act, answering many people who said it wouldn’t intervene, and to what degree it results from a fundamental belief that intervention is needed.” The zloty has soared 27 percent from its five-year low on Feb. 17, 2009, to post the second-biggest increase among emerging-market currencies tracked by Bloomberg for the period. Poland’s economy expanded 1.7 percent in 2009, compared with a 5 percent contraction in neighboring Germany, Europe’s largest economy. The Polish government forecasts 3 percent growth this year, driven in part by recovering exports.

‘Squeeze Out’

“It’s an attempt to slow the pace of appreciation to support the cyclical recovery,” said Koon Chow, an emerging- market currency strategist at Barclays Capital in London. “This should squeeze out some zloty longs but won’t change the medium- term trend, which is driven by inflows from privatization.”

Augustus’s McNamara said further gains in the zloty may be “pretty modest.”

The last time Narodowy Bank Polski bought or sold zloty on the market was in 1998, two years before the currency was allowed to trade freely, Kozinski said. Poland’s government, which had foreign currency equivalent to 6.79 billion euros on deposit in February, had been a more active market participant, selling euros in February 2009 to help stop the zloty’s plunge to a five-year low of 4.9307.

“A one-off intervention like this can succeed, although it’s too early to tell if it will,” Anna Zielinska-Glebocka of the rate-setting Monetary Policy Council said by phone. She added that Polish law requires the central bank to consult with the government in advance of such transactions.

‘Game Changer’

Poland’s decision to abandon its hands-off approach to the currency for the first time since the 1990s may prompt other central banks in the region to reconsider “their previous free- float driven models in favor of a more Asian-style interventionist approach,” said Martin Blum, co-head of asset management at Ithuba Capital in Vienna.

Any such shift may provide at least a short-term boost to central and east European government debt, since currency-buying would augment central-bank reserves and help exports, Blum said. He added that it would also drive up long-term interest rates as weaker currencies raise the prospect of faster inflation.

“It shouldn’t be ruled out that today’s actions by the Narodowy Bank Polski are a game changer,” said Blum, who recommended selling zloty and Czech koruna and buying Turkish lira.

The zloty has fallen from a 16-month intraday high of 3.8234 per euro this week, trading at 3.8765.

PKO’s Narkowicz said the central bank sold zloty today at rates from 3.8480 to 3.8650 per euro.