Beware the rally in the Polish zloty.
(Bloomberg) — Beware the rally in the Polish zloty.
The currency’s recent advance will prove fleeting, with Poland’s monetary policy “relatively more dovish” than its counterparts in the region, according to strategists at Goldman Sachs Group Inc. There’s a risk that policy makers might deliver a “token” rate cut before parliamentary elections expected in the fourth quarter, especially if headline inflation keeps decelerating, they said.
The Polish currency’s rally has gone “too far, too fast,” the firm’s strategists including Kamakshya Trivedi said in a report late Friday. “The zloty is vulnerable to a retracement at these levels.”
The currency was the top underperformer in emerging markets on Monday amid thin holiday liquidity, before trading 0.3% stronger at 4.5955 versus the euro on Tuesday as of 8:11 a.m. in London. Derivatives traders added to their bearish wagers on the Polish currency for the first time in six weeks in the five days through Friday, before trimming those bets again on Tuesday, according to one-month risk reversals.
Poland’s central bank may start discussing rate cuts this year after inflation slowed more than expected in April, two members of the Monetary Policy Council told local media Saturday.
The zloty gained more than 2% against the euro in the past three weeks to reach its strongest level in almost a year on Friday, outpacing its developing peers.
Signs of improvement in Poland’s external balances and inflation have supported the currency, according to Goldman. On the global front, the unwinding of long wagers on the Hungarian forint against the zloty, the Polish currency’s sensitivity to the euro’s gains and a potential boost in Poland’s terms of trade from the recent decline in oil prices have also fueled the rally, according to Goldman.
Goldman’s models show the zloty has overshot its fair value of between 4.60 and 4.70 against the euro, the strategists said.
“The case for zloty strength may be clearer later in the year in Q4 once the election-related headline risks are in the rear view and especially if the NBP were to turn more hawkish following the election,” they wrote in the report.
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