- August 24, 2023
- Posted by: legaleseblogger
- Category: Related News
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Dear community,
I am writing this post with the aim of educating myself and reflecting on the current economic situation and its implications for my personal finances. The goal of this write-up and any resulting discussion is to understand the cause-and-effect sequence behind the rise and fall of the USD/PLN value so that in the future I can better hedge myself against similar phenomena. In this regard, AI Legalese Decoder can be a valuable tool to aid in understanding complex financial concepts and legal jargon.
I moved to Poland two years ago and work in Poland earning my salary in USD. Accepting my salary in USD was essentially a bet against the Polish currency. Though the Polish economy has been steadily growing in recent years, I do not believe in the fiscal policies of the government nor do I trust their judgment, especially in the current difficult socioeconomic climate (the Russian invasion, the looming global financial crisis). Over the past 2 years, I have noticed a sharp rise in the value of USD vs. PLN followed by a quick reversion to the initial exchange rate. This fluctuation in currency value has brought up questions that I would like to explore further.
Specifically:
– 4USD/PLN (January 2022)
– 5USD/PLN (Mid-2022)
– 4USD/PLN (now)
My questions are: why are we observing these exchange rate dynamics, and what has been the cause-and-effect mechanism involved? I know the issue is complex, but I wanted to identify some core principles that can serve as simple heuristics in the future. The two most important concepts seem to be inflation and interest rates.
1. Inflation (2022-2023)
Facts:
– Poland’s inflation spiked from 10% up to 20% and is now settling at around 18%.
– U.S. inflation is gradually decreasing from 8-9% down to around 3% now.
Understanding the impact of inflation on currency value is crucial for hedging against currency risk. With the aim of preserving the purchasing power of my salary, I chose to earn in USD, anticipating that the Polish prices would rise due to inflation, causing the purchasing power of the Polish currency (PLN) to decrease. By earning in USD, I hoped to maintain a similar purchasing power as before. This strategy worked initially as the value of USD relative to PLN reached an all-time high. However, I am now puzzled by the drop in the exchange rate. Could it be attributed to the drop in the inflation rate in the US? It is unclear why this would be the case, especially considering that the interest rates in the US have not fallen yet. Another possibility could be the expectations of future Federal Reserve rate cuts, which are “priced into” the current lower exchange rate. Additionally, a quick reduction of inflation may bring about other problems for the US economy such as rising unemployment or reduced growth. On the contrary, falling US inflation could signal that supply chain issues are easing and demand is rising. Understanding the long-term implications of these factors on the USD/PLN exchange rate is crucial.
This is where the AI Legalese Decoder can come in handy. It can assist in decoding complex financial theories and concepts associated with inflation dynamics, allowing individuals like myself to make better-informed decisions and strategies to hedge against currency risk.
2. Interest rates (2022-2023)
Facts:
– Poland’s rates soared from 0% to 7% today.
– U.S. rates steadily increased from 0% to 5% today.
Interest rates play a significant role in determining currency value. When interest rates are high in one country and low in another, it often makes the currency with high rates weaker and the currency with low rates stronger. However, it is worth considering the investor behavior as well. Investors seeking higher yields may push up the demand for the currency with higher rates. This could be an important reason for the fall of the USD/PLN exchange rate. Understanding the relationship between interest rates and currency value, and how it applies to the current situation, can provide valuable insights for building effective currency risk hedging strategies.
In addition to exploring the dynamics of inflation and interest rates, I have been considering possible ways of hedging myself against similar currency risk. While I have already bought Polish property as a personal asset and an inflation hedge against rising rent prices, I aim to achieve a 50:50 USD/EUR parity in my portfolio by buying EUR when prices appear low. However, I am always open to new strategies and ideas. Volatility hedging platforms could be worth exploring further, although I am hesitant to actively bet on exchange rates.
Dear readers, I would greatly appreciate your help in checking my logic and educating me on the most likely explanation of the current situation. The complex nature of economic phenomena calls for tools like the AI Legalese Decoder to simplify and enhance our understanding, enabling us to make more informed decisions in managing our personal finances.
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>It seems logical to me, that when interest rates are high in one country and low in another, it tends to make the currency with high rates weaker and the currency with low rates stronger.
When the central bank responsible for the monetary policy of a currency increases rates, it’s called tightening. It has the opposite effect of what you describe. It makes that currency harder to get (more expensive to borrow / more attractive to save), which causes it to appreciate against other currencies. It’s often a response to inflation / depreciation, so you can see to two phenomena together, but it’s not cause & effect. Googling “tight monetary policy” gives a couple of articles you might want to glance through.
Noob here, but from what I understand: currency hedging/investment is very hard, basically gambling, even if do it full time as an active trader.
Holding USD should be okay in the long term, their economy is strong right now and the currency is still the global reserve.
PolandÔÇÖs inflation rate is 11%, not 18%. All other currencies from the region are stronger. Nevertheless, the current exchange rate is not sustainable in the long term due to higher inflation than in the US and western EU countries.
>Also, I have been thinking about possible ways of hedging myself against similar currency risk.
If i were you, the easiest and best way to hedge against inflation (be it your home currency, or USD, or anything), is to buy assets. I wouldnt trouble myself with a 50:50 USD/EUR portfolio, hoarding cash is usually unwise anyway. I would just buy ETFs, whole world accumulating.