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We have now turned modestly constructive on the Polish Zloty, given the strong data momentum.The central bank’s dovish stance is unhelpful, but data may challenge it over coming months.
Short-term valuations look cheap, demand for local bonds remains strong and the market is likely to discount political risks without any clear path for EU to impose Article 7 sanctions on Poland.
We still acknowledge that PLN screens overvalued in our BEER FV framework.
Improving fundamentals and diminishing political risk premium PLN has been under pressure since May. Ongoing political tensions with the EU regarding the country’s overhaul of the judiciary have raised the specter of Article 7 sanctions.
Technically, EURPLN has been sliding southwards from the peaks of 4.3323 to the current 4.2838 levels, we foresee more slumps as the bears have managed to pull below DMAs, while both leading oscillators confirmed the intensified selling momentum.
Trade recommendation:
Contemplating above aspects, at spot ref: 4.2024, we advocate entering a new EURPLN 1m2m diagonal debit call spread (4.35/4.2235). The underlying spot FX trend and IVs are favorable to write OTM calls.
Positioning in the currency is a source of risk on the long leg as the investors generally already bullish on PLN. Further controversial actions from the current Law and Justice government may create negative headline noise, which would be detrimental to the currency. Additionally, deterioration in the external environment or sharp increases in core rates would likely weigh on PLN and cause the trade to under-perform.
