Tags: Polish | zloty | euro | NBP

Poland Shines Within Stagnating Europe

By    |   Wednesday, 22 April 2015 08:08 AM

Recent asset prices in Polish zloty crossed certain key thresholds. This has caught the attention of many analysts and made me focus back on of my favorite countries in Europe.

In the past couple of days, the Polish zloty has dipped below the 4.00 mark against the euro. This is a critical level for the zloty, as historically the euro and zloty have moved in tandem. But in the past several weeks, the zloty has strengthened against the euro.

The National Bank of Poland (NBP)'s policies have diverged recently, both within the region and against the major central banks. The NBP cut rates twice by 50 basis points but declared an end to the easing cycle after the March cut.

We can see a sustained effort by the NBP to allow the Polish zloty to strengthen when you contrast this view by those of the European Central Bank (ECB) or the Federal Reserve (which sounded dovish as usual). Not only did the NBP clearly indicate that they will not be cutting rates for now but they have shown more tolerance for the appreciation of the zloty exchange rate against the euro.

I also think that the Polish economy and financial sector are less exposed to deterioration in risk sentiment, especially on higher U.S. rates or Greece-related risks, and Polish long positions should outperform in relative terms even during risk events such as a Greece exit, if that happens.

As the zloty broke the psychological 4.00 euro level, the markets have wondered if this move is sustainable. I believe that the strength will continue and deepen, as the divergence between the ECB and Fed views versus the NBP will continue.

This is a result of a stronger cyclical position of the Polish economy and a solid outlook for domestic demand supported by improving labor markets. This makes the Polish economy less dependent on net exports (unlike in the earlier stages of the recovery when exports were the sole growth engine) and the NBP less concerned about the zloty's strength.

Staying in the region, the Hungarian forint does not enjoy as rosy an outlook as the Zloty does. While the forint has seen appreciation, it is unlikely that the National Bank of Hungary will allow for further appreciation in the forint. This is because of the particularly high role of exports in Hungarian growth. So the country's policy would be to see a gradual decline in forint rather than sharp appreciation.

While I am sure that the Polish zloty will rise, there is a limit to which the NBP will allow the rise. Any sharp shifts will be met by central bank interventions. But gradual moves will be supportive.

One can play this move by shorting the euro versus the zloty. At this stage we may be able to see a further 10 percent gain in the next few months. For the risk-takers with higher tolerances, you may want to short the forint or the Czech koruna against the Polish zloty and play for higher gains.

Once again, this is for those with high risk tolerance and with discretionary capital for such trades.

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Recent asset prices in Polish zloty crossed certain key thresholds. This has caught the attention of many analysts and made me focus back on of my favorite countries in Europe.
Polish, zloty, euro, NBP
Wednesday, 22 April 2015 08:08 AM
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