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The Polish zloty has staged an impressive recovery over the past fortnight, strengthening from a low of 4.40 against the euro in early July to near 4.30 at present. One of the drivers of this rally has been a resilient growth outlook despite slippage in German economic indicators such as the Ifo.
Polish policymakers have commented that they expect around 5% GDP growth for Q2 as well (the same as in Q1). They refer, of course, to year-on-year GDP growth – but, a 5% YoY reading for Q2 would imply a much slower 0.9% QoQ increase, compared with the 1.6% QoQ reading of Q1. What is more, the latest manufacturing data show industrial output growth slowing down to just 0.1% MoM in May. Confidence in a solid growth outlook has been a notable feature of the Polish business landscape over the past year, and this has been a supportive factor for the zloty.
The projections reckon that this acceleration of growth would not last in the quarters to come – latest data reinforce this stance, and although growth may not be the primary driving force of the exchange rate, the data support our story of a weaker zloty over the coming year.
With Euro area activity recently surprising to the upside, overweight in PLN in our Fx portfolios maintained. While valuations still seem to be luring, screening around 5% cheap in our BEER FV model. Furthermore, Zloty should be relatively less impacted by increased trade tensions in the auto sector (with about four times less export/GDP exposure than Hungary or the Czech Rep.)
Trade tips: Buy 3M EURCAD 25D call vs sell EURPLN 25D call, equal vega, low decay defensive RV.
Currency Strength Index: FxWirePro's hourly EUR spot index is at shy above 33 levels (which is bullish), while hourly CAD spot index is edging higher at 153 levels (bullish) while articulating (at 13:47 GMT). For more details on the index, please refer below weblink:
