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We have now turned modestly constructive on the Zloty, given strong data momentum.The central bank’s dovish stance is unhelpful, but data may challenge it over coming months. Short-term valuations look cheap, demand for local bonds remains strong and the market is likely to discount political risks without any clear path for EU to impose Article 7 sanctions on Poland. We still acknowledge that PLN screens overvalued in our BEER FV framework.
Thus, we were already short in EURPLN spot, we recommend upholding below strategies:
Stay short in EURPLN spot, which is trading at 4.2335. The position generates carry of about +15bp per month. We target minimum 3.75% southward moves upto 4.1650, and place a stop-loss at 4.2650 levels.
Alternatively, options trading strategy has also been advocated.
At spot ref: 4.2335, we advocate entering a new EURPLN 1m2m diagonal call spread (4.1650/4.2650). The underlying spot FX trend and IVs are favorable to write ITM calls.
Rationale:
Consolidation of core rates. We believe that current valuations in PLN are attractive to establish a short EURPLN position. In our view, US and EUR rates may consolidate following the sharp re-pricing higher.
Diminished political risks: Although political headline noise will persist in Poland under the current government, we see no ultimate risk of strident penalties against the country, as allies such as Hungary and the Czech Republic are likely to oppose sanctions on Poland.
Improving fundamentals: Economic data point to robust growth dynamics and improving macro-fundamentals, underpinned by rising household disposable income, recovery in private consumption, growing investment, improved tax collection, and a tightening labor market.
Key levels & strategy: Add to the position, further room for gains despite the recent strong run.
Risks & what to watch for:
Positioning and politics: Positioning in the currency is a source of risk, with investors generally already bullish on PLN. Further controversial actions from the current Law and Justice government may create negative headline noise.
