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There are three reasons pointing towards a weaker zloty over the coming years: first of all, growth would slow down in the H2’2018 following a boom period. Secondly, the political event risks (in particular as a result of conflicts with the EU) remain high. And thirdly real interest rates will fall due to the cautious central bank. Due to special effects as a result of Brexit, the current account deficit will remain elevated though.
Despite these factors, but there could be sort of some hawkish surprise for NBP down the road – the 7%-plus wage growth of recent months is beginning to exert some inflation pressure. Even if our current call for two rate hikes this year proves too optimistic, one hike should not be ruled out.
Governor, Adam Glapinski, of course often reiterates that rates will be on hold all year. Despite rate hikes, the real interest rate in Poland will remain negative and the current account deficit is likely to widen, which means that EURPLN is likely to maintain an upward trend. There would be downside risk to this forecast if NBP were to turn markedly hawkish sooner.
High yielding EMs unsurprisingly dominate the top of the table, but our interest lies more in pairs where the direction (call/put) of calendar spreads has stronger fundamental justification. EURPLN and EURRUB (both EUR puts/currency calls) are two that stand out at current prices: the European cyclical recovery is conducive to a gentle slide in EURPLN, while stronger oil prices and attractive yields should see persistent investor sponsorship of the ruble.
-1M /+2M 4.13 strike EUR put/PLN call OT spreads (spot ref. 4.1456) and -1M /+2M 67.75 strike EUR put/RUB call OT spreads(spot ref. 69.65) both cost 15% and yield 2:1 static gearing after transaction costs if spot remains unchanged at the expiry of the short leg – an acceptable payout for a month’s work.
