EUR/PLN: A major shift in underlying trend? – Rabobank

Last year the Polish zloty was the second best performing CEEMEA currency firming 5.3% against the euro and 20.2% versus the US dollar as the zloty benefited from robust economic activity with the pace of GDP growth accelerating to 5.1% y/y in Q4 from 4.9% in Q3, explains Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“The external backdrop throughout last year was also conducive for the zloty due to synchronised global recovery amid low inflationary pressure. In addition to that capital inflows to Polish assets were fuelled by accommodative financial conditions with the Fed raising rates gradually at the time when other major central banks continued to provide unprecedented amount of liquidity.”

“All those positive factors outweighed the risk that Poland could be penalised by the EU for breaching the rule of law by implementing various controversial measures regarding the Constitutional Tribunal and the judiciary.”

“While the Polish currency had a promising start to 2018, it proved short-lived. Rising market concerns about global trade wars and the prospect of a faster pace of tightening by the Fed undermined sentiment towards risky assets as reflected in the sharp sell-off in Polish stocks. After rallying in January to the highest level since 2011, the WIG20 Index plunged more than 14%.”

“It is worth watching EUR/PLN as the price action so far this year resembles the inverse head and shoulders technical pattern, which indicates that the predominant trend may reverse. By measuring the distance between the head (the year-to-date low) and the neckline, we obtained a short-term target of 4.25, although we would aim first at the December high at 4.2252.”

“Not only has the inverse head and shoulders been validated, but more importantly EUR/PLN has cleared the long-term downside trendline from the 2016 high producing a bullish signal.”

“A close above the 4.26~ pivot would support the notion that a major shift in the underlying trend is taking place in EUR/PLN. The September high at 4.3324 would be next potential target.”

“Gains in EUR/PLN could be driven by an escalation of market concerns about Trump’s protectionist policies, a hawkish Fed vs persistently dovish Polish MPC, the ongoing dispute between Warsaw and Brussels that could culminate in EU funds for Poland being significantly reduced, and/or rising geopolitical tension.”

“We have to be mindful that for major market participants current levels may prove attractive to sell EUR/PLN, which would limit scope for further gains. After all, the zloty is supported by lack of significant imbalances in the Polish economy: GDP growth is broad-based, C/A deficit is low and budget gap is below the 3% of GDP. Capital outflows from emerging assets have been so far relatively limited as well.”

“That said, the price action in EUR/PLN has been constructive and bullish signals generated by technical indicators could be reflected in the coming months in fundamentals, i.e. the Polish economy losing momentum and the outlook deteriorating significantly should full scale trade wars unfold.”