FX Strategy Upside risks to EURPLN NBP set to stay put on Friday

Transcription

1 Investment Research General Market Conditions 4 May 2016 FX Strategy Upside risks to EURPLN NBP set to stay put on Friday While the weakening of the Zloty was expected, market reaction to the negative risks has been stronger than expected so far. There are upside risks to our mid-may target for EUR/PLN of 4.35 from both external (Moody s rating review, Brexit, global risk sentiment) and domestic (Swiss loan conversion proposal) factors. We maintain that EUR/PLN should fall to 4.30 on 3M and 4.22 on 6M as some of these risks dissipate. We expect NBP to keep its policy rates unchanged on Friday and the remainder of the year, providing support to the zloty in H2 16. Further zloty weakness could be on the cards After strengthening more than 5.5% against the euro since the slump in January, the zloty has weakened by almost 3.5% since April, underperforming emerging market currencies by a significant margin. The EUR/PLN currently trades at The weakening does not come as a surprise to us we forecast the cross will increase to 4.35 in our mid-april FX forecast update (FX Forecast Update: Warning speed bump ahead, 15 April) and at the same time flagged significant upside risks. However, market reaction to these risks has been stronger than expected. In this document we take stock of these risks and the implications for the zloty going forward. A possible Moody s downgrade. We expect Moody s to publish its rating review on 13 May. On 4 April, it warned that wrangling over the constitutional court issue was credit negative, which has given the market reason to believe in a rating cut. A full-notch rating downgrade to A3 is certainly a possibility in our view, given that Moody s rating is one and two notches above Fitch and S&P, respectively. On purely macroeconomic terms, Poland is neither worse nor better than countries with lower ratings (see chart) and a downgrade would be mainly on concerns about the controversial policies versus political institutions similarly to S&P s reason for its downgrade in January. We think a full-notch downgrade is more or less priced in by the market. Hence, should the rating agency only revise its outlook to negative, we think the zloty should strengthen and, in the unlikely event of a two-notch downgrade to Baa1 (to align with S&P), EURPLN may go back to the 4.50 seen in January after the S&P rating cut. Zloty has underperformed other emerging market currencies by a wide margin in April Economic fundamentals provide little clue about the Moody s rating decision % Real GDP growth Primary balance % of GDP Current account Public debt (gross) (lhs) Poland (A2) A3 Baa1 Note: Data for 2016; A3 countries include Latvia, Malaysia, Mexico and Peru, while Baa1 includes Ireland, Mauritius and Thailand Source: Moody s, IMF WEO April Swiss loan conversion proposal: Since President Andrzej Duda announced his plan of a Swiss loan conversion in January, the market has feared the consequences for the Polish banking sector and the broader economy. Recently, President Duda announced that a revised conversion plan should be put to parliament soon. Even if it is, we think the government will try to delay the adoption and amend the scope of the plan simply because (i) it is not really in the interest of the government as most of its supporters will not be the main beneficiaries and (ii) the plan would imply a significant cost for banks and public finances, risking derailing the government s more important political plans (child benefit package, increase in tax free threshold and lowering of pension age). Chief Analyst Jakob Christensen Jakc@danskebank.dk Important disclosures and certifications are contained from page 4 of this report.

2 Public stand-off over governance issues in Poland and with EU. Large antigovernment demonstrations are planned in Poland this coming weekend, which could stir negative political and investor sentiment. Since the Venice commission published its negative verdict on Poland in early March, the EU has quietly attempted to find a solution with the Polish government on the deadlock between the two sides, so far without success. In a conciliatory sign, the Polish government side has tasked a parliamentary working group with presenting a draft law aimed at fixing Polish constitutional court issues. We do not think the EU will seek an open confrontation given the scale of the other hurdles currently on its plate. Brexit risks. We think the Brexit issue could increasingly weigh negatively on the zloty and other periphery currencies as the referendum draws closer, especially if the leave camp gains traction in the polls. However, our base case of Britain staying in the EU would mean the effect should wane following the referendum in late June. A global risk-off sentiment. A significant reason for the strengthening of the zloty between mid-january and April was generally positive risk sentiment towards emerging market currencies. A reversal of this sentiment could weaken the zloty. In conclusion, we see upward risks to our mid-may forecast of 4.35 for EUR/PLN. We think there is a high likelihood of an overshooting of the target and perhaps even moving to 4.50 if the negative risks above materialise at the same time. However, we maintain that the zloty will strengthen once we get past the UK referendum and a more modest Swiss franc loan conversion plan is pursued. Furthermore, as we expect the Polish economy to grow quite strongly in the second half of the year together with a relatively strong external position and somewhat undervalued zloty, these factors should support the zloty in Q3 and onwards. Hence, we keep our EURPLN 3M and 6M targets of 4.30 and 4.22, respectively. NBP set to keep its policy rates unchanged on Friday and for the rest of the year We expect NBP to keep rates unchanged on Friday, in line with consensus. We agree with the central bank that the recent weakness in prices has been mainly externally driven. As oil prices have recovered somewhat, the energy components of the CPI could drive inflation higher in coming months. At the same time, the momentum in the Polish economy is still relatively strong and we expect it to be boosted further by stronger consumer confidence with the kick-in of the child benefit scheme in June and a pickup in external demand. The EU commission yesterday raised its growth forecasts for Poland to 3.7% in 2016 and 3.6% in 2017 (coming close to our projections of 3.8% and 3.5%, respectively). Zloty fundamentally undervalued and current account fairly strong In our view, the market is pricing the NBP too dovishly. We estimate that markets are pricing in a rate cut. However, given the strong growth in the economy and tight labour market, we think inflation pressures should start to build. Hence, we think NBP will refrain from cutting rates over the next year, which should provide support to the zloty in the second half of May

3 Amid weak inflation developments......market is pricing in a rate cut over the next year... However, the economy will see solid growth......increasing inflation pressures, yielding little room for rate cuts 3 4 May

4 Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The author of the research report is Jakob Christensen, Chief Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication. General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. 4 4 May

5 This research report is not intended for, and may not be redistributed to, retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report was created by Danske Bank A/S and is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank A/S, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. 5 4 May