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PLN remains our top pick for an outperformer in the region have started the year stable with no major events. This is despite the repricing lower of monetary policy expectations across the region and the risks for slower growth impacting local rates. Market participants have known for a while that funding for CEE countries will be cut sharply in the EU's 2021-27 budget. This is not new. But, there was a valid question mark about whether such a deep cut would, in fact, be implemented, or whether the gap would be ultimately papered over by developed EU members.
In this context, the latest remarks by Poland's Growth and Investment Minister, Jerzy Kwiecinski, appear to confirm that CEE countries are accepting or are resigned to the idea of a massive funding cut. In an interview, Kwiecinski sounded upbeat that his latest information was that Poland would receive more than EUR 65bn from EU's 2021-27 budget, up from the EUR 64.4bn of the EC's initial proposal. He accepts that funding under Cohesion and Common Agriculture Policy (CAP) would be lower by nearly 27% (lower by EUR 4bn a year). For us, it is hardly material whether funding will be EUR 64.4bn or EUR 65bn; the drop from the current EUR 84bn is equally stark, and the key point is that the drop is looking increasingly realistic. Such a development would be a zloty-negative.
PLN/HUF longs are activated given the divergence in external accounts and real yield differential.
OTM EURPLN calls: Our EMEA team has a constructive take on the zloty, which is a first order source of comfort for vol sellers. Exposure to a slow burn recovery in the Euro area, strong domestic dataflow that has anchored growth forecasts at an impressive 3.8% pace for 2H’18 and revival of FDI inflows are FX positives that should promote PLN outperformance vis-à-vis regional EM peers.
On the vol side of things, EURPLN risk-reversals have been elevated for a while (SABR implied spot-vol corr for 3M riskies 42%), but it is only in the past couple of weeks that realized spot-vol corrs have plummeted (10-day spot-3M ATM vol corr. -20%) and created genuine value in shorting OTM EUR calls on the surface. This is better done in shorter rather than longer maturities given the flatness of the vol curve.
Taking advantage of this richness via short EURPLN – long EURUSD option spreads using OTM EUR calls. Courtesy: JPM & Commerzbank
Currency Strength Index: FxWirePro's hourly EUR is at -55 (bearish), while USD is inching at 78 (which is bullish), at press time 14:09 GMT.
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
