FxWirePro: Polish zloty unlikely to surge further in near future – Hedge EUR/PLN upside risks via RV and vanilla trades

We have moved neutral-to-slightly bearish in PLN against EUR over the medium term. The zloty is currently around fair value, with risks from forced FX mortgage conversions having largely faded. The risk of inflation overshooting is seen as limited and a stable rates scenario for 2017 is foreseen, which is in line with the central bank’s stance. We expect a hike of 50bp for 2018 starting in the middle of next year.

On the flip side, euro is stimulated PMI indications, composite PMIs in the euro area is printed an upbeat manufacturing PMI data (actual 56.8 versus forecasts at 56.1 and previous flashes 56.2) and service PMIs at 56.2 versus forecasts and previous flashes at 56.0. While the manufacturing data for March surprised strongly the last week, with output rising by 2% m/m after seasonal adjustment compared with average 0.7% month-on-month increases during the previous three months.

Intermediate and capital goods segments performed particularly well, which is consistent with business confidence recently having been boosted by strong German orders. German IFO business climate data that came in today has produced an upbeat data (actual 112.9 versus forecasts and previous flash at 112.4). That said, global inflation data do not appear to be accelerating any further at this time; in fact, there are some tentative signs that the global economic cycle could even be reaching a peak.

If so, then these Polish data, as encouraging as they are, will prove to be more backward-looking than forward-looking, and in particular, they will not influence the Polish central bank's loose monetary stance.

This is why the strong manufacturing data did not help the zloty; EURPLN continued its upward move of the past week.

Long 2m EURPLN call (4.35), spot ref: 4.2341.

Sell 1Y 25D EURPLN call vs. Buy 1Y 25D EURUSD call.