Asia United: Try Polish Currency Intervention

♠ Posted by Emmanuel in at 4/09/2010 04:54:00 PM
Ah, the joys of central banking in the current era of globalization. It seems that dirty floats, managed floats, or whatever derisive terms economists have conjured up for the currency practices of Asian countries that take an active approach to managing exchange rate policy are all the rage nowadays. In recent weeks we've seen Swiss currency intervention to stem lost export competitiveness vis-a-vis the euro. As we all know, the euro is taking its lumps due to the Greek tragicomedy. Now, Reuters adds that no good deed of prudent financial management goes unpunished as speculators bet on Polska--the only EU economy not to enter a recession last year and whose fiscal trajectory is not particularly daunting:
Poland's central bank sold zlotys on Friday, surprising markets with its first intervention since introducing a free float in 2000 as it sought to temper the surging currency's impact on exports and the wider economy. The central bank said in a statement it had bought "some currencies" on the market around Friday. It gave no other details, but a Warsaw-based dealer said he believed the central bank bought about 40-50 million euros for zlotys.

The action, which the government said it backed fully, drove the zloty down 0.5 percent against the euro, though economists said the currency might strengthen again. The European Union's biggest ex-communist member, Poland is the only country in the bloc to have avoided recession last year and currency investors have taken note.

Before Friday's move, the zloty had gained 6 percent against the euro in the year so far and was near a 16-month high. "This is a battle with our own success because the zloty's rise in the last three months is a result of the large demand for Polish bonds from abroad, as well as privatisation inflows," said Rafal Benecki, senior economist at ING Bank.

The country's robust growth prospects stand in stark contrast to a number of European countries, notably peripherals such as Greece or Spain. Poland's debt levels are also well below the EU average, making Polish debt attractive to investors. "This is definitely a beneficial move. It's a factor that the market needs to take into account in its analysis. We fully agree with the central bank's policy on that matter," Deputy Finance Minister Dominik Radziwill told Reuters by telephone. He said the ministry shared the central bank's concern over the zloty's strength.

At 1305 GMT, the zloty was at 3.8720/50 [bid/offer] per euro, sharply weaker than 3.8340 earlier on Friday. The currency's strength has prompted concern that Poland could pay an economic price as zloty gains have made exports less competitive. But some analysts doubt the central bank will be able to halt the zloty's rise. "We remain confident in the medium-term uptrend in the zloty," said Koon Chow, FX strategist at Barclays Capital. "We think the central bank wants to slow the pace of zloty appreciation so as not to imperil the cautious cyclical recovery."
The FT quotes those saying the Polish action was a "game changer" for other central European economies could follow suit, raising competitive pressures Europe-wide. Free floating currencies? That's oh so very 1995, dahling.