Changeable weather for the Polish zloty and Israeli shekel
The National Bank of Poland’s (NBP) highly accommodative stance has been weighing on the zloty. However, the strong domestic macro backdrop, a more hawkish stance among central banks elsewhere and risks of a de-anchoring of inflation expectations suggest that the start of a normalisation of Polish monetary policy may be nearer than the central bank has been signalling.
The Polish economy is tightly intertwined with the rest of the EU. So, barring idiosyncratic risks, the outlook for the zloty should be similar to that for the single currency. We do not expect one such risk, resolution of the Swiss mortgages issue, to alter the tight correlation between the Polish zloty and the euro, even though the Polish banking sector could be exposed to severe losses as CHF-denominated loans are converted into PLN-denominated ones (implying purchase of Swiss francs to deal with the asset-liability FX mismatch). The NBP could step in to avoid any significant move in the FX market caused by this development, using its FX reserves to facilitate the conversion of Swiss franc mortgage loans into zlotys.
Our projections for the EUR/PLN rate are PLN4.55 in three months, PLN4.40 in six months and PLN4.35 in 12 months.
We see a current account surplus and foreign direct investment inflows as structural supportive drivers for the Israeli shekel. Yet the Bank of Israel is likely to continue to favour interventions in the FX market to curb the strengthening of the shekel, having pre-committed to purchase a record amount of foreign exchange over 2021. Also, low inflationary pressure before the pandemic suggests that the central bank will be cautious before raising rates, just as other central banks are turning more hawkish.
The disparate government coalition formed under Naftali Bennett still looks relatively fragile. The coalition’s very narrow majority in parliament. means passing a budget could prove challenging. Credit-rating agencies may lose patience should fiscal uncertainties perdure, possibly leading to downgrades to Israel’s credit rating. Combined with a rise in US long-term rates, these factors could make the low-yielding shekel less attractive in the short term.
At the same time, further moderate weakness in the US dollar over the next few years and the balance of payments mean we are relatively positive on the shekel versus the greenback over the longer term. Our projections for the USD/ILS rate are ILS3.30 in three and six months and ILS3.25 in 12 months.