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The MPC of Polish central bank (NBP) meeting yesterday was a non-event from a rate standpoint. But it brought fresh dovish emphasis as per the market anticipation.
Perhaps the CB's latest message is best summarized by the paragraph "after a significant rise at the beginning of the year, [inflation] declined somewhat in March. Core inflation remains low, which points to still weak demand pressure.
Despite growing employment and wages, growth in unit labour costs remains moderate".
Governor Adam Glapinski remarked that he personally sees no reason for the policy rate to be higher even by the end of next year -- this matches our own forecast of no rate hike this year or next.
As the ECB is expected to taper its purchases later this year, we expect EURPLN to gradually rise by the end of 2017.
Fading European political risks and strong equity market performance leads us to move MW PLN in the JP Morgan’s GBI-EM Model Portfolio. For zloty, risks from forced FX mortgage conversions have largely faded, and medium-term valuations are currently around fair value.
In addition, while we do not expect rate hikes in Poland until mid-2018, the NBP is relatively hawkish compared with the NBH. The Polish central bank has guided the market towards stable interest rates, whereas the Hungarian central bank is actively pursuing stimulative policy, despite a more aggressive inflation profile.
Currently, it seems that the risk-reward is more favorable for HUF shorts, prompting us to turn MW PLN (from UW) and increase the size of our UW HUF position. We maintain an UW CEE FX allocation overall, via UW HUF partially hedged with OW RON.
In outright trades, it is encouraged to hold 1m EURPLN calls, to keep exposure to potential contagion from political anxiety in Europe in the run-up to French presidential elections next month, although this risk has been falling in recent weeks.
GBI-EM Model Portfolio: UW HUF, OW RON and OW RUB.
The base case is that the CNB will scrap the floor on May 4th regular policy meeting, but given the continued build-up in reserves, an earlier exit is almost as likely.
Outright trades:
Long 26-Apr-17 EURPLN call (4.35), spot ref: 4.2244.
Short 27-Nov-17 EURCZK forward.
Short EURILS.
We think fundamental appreciation pressures should gradually begin to assert themselves once the koruna stabilizes, EURCZK to reach around 26.00- 26.25 by year-end; hold short 27-Nov-17 EURCZK forwards.
