Political environment mount pressures on PLN

EUR-PLN spiked sharply over the past couple of days, surpassing 4.29 at one point during trading yesterday, after election results showed that right-wing Law & Justice (PiS) won a stronger-than-expected majority in both houses of parliament.

This would buoy up the party to roll out many of its controversial policies such as reversal of pension reform, imposition of taxes and mortgage losses on banks and higher social spending.

We evaluated the propositions EM briefing on Poland in brief - the bottom-line is that the market cannot efficiently discount all outcomes because PiS is not yet equipped to propagate information about a final policy action plan - this will take time to put together.

Key pieces of legislation such as how CHF mortgages will be converted to local currency are not ready yet.

There will even be question marks about who will be in the PM position a year from now - PiS' controversial leader Jaroslaw Kaczynski or Beata Szydlo who is likely to be appointed now.

As a result of the lack of visibility, we can expect significant FX volatility in the months ahead.

Hence, for now our trade recommendation would be - buy USD/PLN vs EUR/PLN vol spreads for a revival.