FxWirePro: Polish attempt to resurge on NBP – Chip in EUR/PLN slumps and hedge upside risks via “Diagonal Credit Call Spreads”

The Polish central bank held its rate decision today: no change in monetary policy was the consensus.

The National Bank of Poland announced its reference rate at a record low of 1.5 pct on October 4th, 2017, as widely expected. Also, the Lombard rate and the deposit rate were kept unchanged at 2.5 pct and 0.5 pct, respectively, and the rediscount rate was left at 1.75 pct. The central bank ended an easing cycle in March 2015. 

But, what about language on inflation risks? The flash CPI estimate for September displayed a strong reading of 2.2% YoY. It is possible that all the acceleration came from seasonally volatile categories, and that core inflation rose only by 0.1pp or stayed flat, the data breakdown will be available in two weeks.

The MPC has noted in past statements that there is no price pressure in the economy despite strong fundamental developments – we should watch the language on this topic very carefully today.

We still expect the MPC balance to remain in favour of doves through 2018, but this is going to be an evolving situation. If NBP were to sound less dovish today in response to the latest inflation and wage readings, we should expect downward pressure on EURPLN in the coming months.

Thus, we were already short in EURPLN spot, we recommend shorting EURPLN spot, which is trading at 4.2990. The position generates carry of about +15bp per month. We target a 3.75% move lower to 4.1485 and place a stop-loss at 4.32 levels.

Options Trading Tips:

At spot ref: 4.2990, we advocate entering a new EURPLN 1m2m diagonal call spread (4.2625/4.3325). The underlying spot FX trend and IVs are favorable to write ITM calls