Poland’s zloty has for a while underperformed regional peers, as can be seen in the charts below:
According to some analysts, a lot of the under-performance may be attributed to the number of deeply out of the money FX options in the corporate market place, and the attendant need for hedging.
However, as Barclays notes in a recent report, many of those FX options are set to expire come September. In which case, some of the factors preventing the zloty from running a more bullish course could soon be eliminated.
As the analysts explain, the expiry of these options – as well as other fundamentals like strong retail sales and an ever improving current account balance – now makes a solid case to buy the zloty:
We would add that alongside these fundamental supports are other encouraging zloty technicals, namely the expiry of the bulk of the FX option positions by Polish corporates in September. Earlier this year, the hedging activity associated with these FX options positions likely contributed to zloty weakness and the underperformance of the zloty relative to other emerging market currencies. These flows should now be over, allowing underlying commercial flows (the basic balance) to drive the zloty higher.
But there is one area of concern — inflation, which remains stubbornly high despite the economic slowdown.
For example, while Tuesday’s retail sales numbers were indeed much better than expected at 5.7 per cent year on year versus a consensus figure of 1.4 per cent, much of that improvement could be put down to the influence of higher prices and rising wages.
Unsurprisingly, it is now expected the National Bank of Poland will factor the above into its Wednesday interest-rate decision and announce the end of its current rate-cutting cycle, despite previously hinting there was still room for more accommodative policy. The benchmark rate is seen unchanged at a record low of 3.5 per cent for a second month.
As Danske Bank’s emerging markets team explain:
We expect the Polish rate meeting to be a non-event today as it is broadly expected that the central bank (NBP) will keep its key interest rate unchanged at 3.50%. However, the NBP governor Slawomir Skrzypek reiterated that the NBP is still on an easing bias, and our “simulations” of the interest rate — based on an augmented Taylor function — show there is some room for lowering rates at the beginning of 2010. However, we note that the latest inflation, wage data and retail sales trends are slowly closing that window.
The NBP decision is due at 1300 BST.
Related links:
CEE’s stand against SPECTRE-lators - FT Alphaville
The art of selling toxic FX options – FT Alphaville