The recent turmoil in the financial markets has confirmed EMEA FX remains the weakest link in the EM space. In CEE, we see that the Polish zloty is one of the most sensitive currencies to global market headwinds. Valuation metrics suggests that the PLN is too strong and the structure of the balance of payments makes the PLN vulnerable to a sudden change in capital flows dynamics. If the global economic and financial crisis intensifies EUR-PLN may rise towards 4.50. Only a direct intervention from the central bank would stop the upward movement as the interest rate tool is no longer available. However, we believe that the NBP’s tolerance for a weaker zloty is on the rise with the change in the inflation/growth mix.
As an option play
Expiry: 3 months
Buy a EURPLN Call spread 4.2500 / 4.3500
Vols: 13.25% vs 14.30%
Off spot 4.2275: Prem 0.81%
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HSBC Global Research