Goldman and JPMorgan Diverge on Zloty Outlook After Rates Drama

Two of Wall Street’s biggest investment banks are diverging on their outlooks for Poland’s zloty after a surprise interest-rate cut sparked the worst week of selling since Russia’s invasion of neighboring Ukraine.

(Bloomberg) — Two of Wall Street’s biggest investment banks are diverging on their outlooks for Poland’s zloty after a surprise interest-rate cut sparked the worst week of selling since Russia’s invasion of neighboring Ukraine. 

Goldman Sachs Group Inc reduced its targets for the currency, saying the central bank’s cut last week will likely lead to a zloty-negative “prolonged inflation overshoot.” JPMorgan Chase & Co., on the other hand, said it wouldn’t make bearish bets given Poland’s sound economic fundamentals, and would look for opportunities to go long.

The zloty traded 0.2% weaker at 4.6206 against the euro as of 11:35 a.m. in Warsaw on Monday, near its weakest level since April after last week’s 3.4% slide. The WIG20 stock index started the week 0.7% higher following a 5.2% slump last week.

Wednesday’s 75 basis-point rate cut, three times larger than expected, sparked the selloff as it raised questions about the central bank’s determination to curb inflation. Some analysts also saw it as a politically motivated maneuver coming just before a tightly contested general election on Oct. 15, with the main opposition party saying it’ll convene a special tribunal to try Governor Adam Glapinski if it wins power.

Read More: Polish Opposition Calls for Tribunal to Oust Central Bank Chief

Unless expectations for European economic growth improve, risks for the zloty remain “skewed toward further weakness in the near-term,” Goldman Sachs analysts including Kamakshya Trivedi said, although they see the currency strengthening marginally from current levels over the longer term. The strategists cut their 3-month zloty forecast to 4.65 per euro, 6-month target to 4.6 and kept their 12-month view unchanged at 4.55.

JPMorgan strategists including Meera Chandan took another view, saying they’ll be on the lookout for entry points to go long zloty against the Czech koruna given Poland’s positive external balance. However, “this may now require October elections to pass, which should reduce the overly easy bias from both monetary and fiscal policy,” they said.

Rafal Benecki, chief economist at ING Bank Slaski SA, said the ruling party’s latest election-campaign promise to lower the age at which Poles can tap state pensions adds to the fiscal and inflation headwinds facing the bond market.

“The latest budget, retirement, wage and social-spending decisions suggest the return of high inflation,” he said. “This suggests further weakening of long-term bonds and a steeping of the yield curve.”

The yield on Poland’s benchmark 10-year local-currency bonds dropped 1 basis point to 5.58% on Monday. Concerns over longer-term inflation have already steepened the yield curve, with the spread between 2-year and 10-year notes widening to 80 basis points, the highest in 20 months.

–With assistance from Konrad Krasuski.

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