Zloty Declines Against Euro for Third Week as Economy Slows

By Yon Pulkrabek

Dec. 20 (Bloomberg) -- The Polish zloty dropped for a third week against the euro as investors bet the central bank will cut interest rates further to cushion the economy from the biggest slowdown in almost a decade.

The currency snapped five days of losses yesterday after dropping to a more-than 3 1/2-year low on Dec. 18, when a report showed industrial output shrank 13.1 percent in November, the biggest contraction in more than 16 years. The zloty gained as its relative strength index against the euro signaled traders judged its decline excessive.

The zloty was at 4.0861 per euro late yesterday in Warsaw, from 4.1104 the previous day, paring the weekly drop to 3.5 percent. The currency, which slid to 4.1887 on Dec. 18, its lowest level since May 2005, has weakened 12 percent this year.

“The Polish currency weakened in expectation of a rate decrease,” analysts including Jan Bures and Jan Cermak at Ceskoslovenska Obchodni Banka AS, the largest Czech lender, wrote in a note today.

Policy makers will cut the main interest rate by 50 basis points to 5.25 percent when they meet Dec. 23, according to a median forecast of 15 economists in a Bloomberg News survey.

The Monetary Policy Council lowered the rate by 25 basis points last month as inflation pressure eased and economic growth slowed. That was the first interest rate cut since February 2006, and policy makers including Jan Czekaj, Stanislaw Owsiak and Marian Noga have said further easing is in the cards.

Polish central bank Governor Slawomir Skrzypek said yesterday he may have to lower his forecast for economic growth next year.

Relative-Strength Index

The RSI for the zloty against the euro fell below 30 on Dec. 18, indicating an imminent rebound by the currency. “A lot of negativity has been priced into the zloty over the past weeks,” analysts led by Elisabeth Gruie and Shahin Vallee at BNP Paribas SA in London wrote in a note today. “The current level has been deemed misaligned with fundamentals.”

Elsewhere, the Czech koruna fell 0.5 percent to 26.401 per euro, dropping this week to 1.2 percent. The country’s central bank reduced its two-week repurchase rate by half a percentage point to 2.25 percent on Dec. 17.

The Turkish lira declined 1.3 percent to 1.5284 per dollar, paring a weekly gain to 2 percent, after the nation’s central bank lowered its benchmark rate by 1.25 percent to 15 percent, the biggest cut since December 2004.

Hungary’s forint rose 0.7 percent to 264.50 per euro, gaining 0.8 percent in the past five days. The Romanian leu advanced 0.6 percent to 3.9297 per euro, climbing 0.3 percent since Dec. 12.

To contact the reporters on this story: Yon Pulkrabek in Prague at ypulkrabek@bloomberg.net