EUR/PLN likely to rise gradually to 4.50 in coming quarters, says Commerzbank

The Polish zloty started underperforming in 2015 following the victory of PiS government in election and after it launched its unconventional policy agenda featuring sector taxes, FX loan conversion, pension changes and controlling the powers of the Constitutional Tribunal. The government has a sceptical stance towards the European Union and has no interest in joining the euro, noted Commerzbank in a research report.

Furthermore, slow economic growth is expected to lead to budget revenue underperforming, while promised spending would possibly lead to the fiscal broadening to 3 percent of GDP or more by 2018. However, the market is becoming used to unconventional policies around several similar emerging markets. Therefore, Poland’s risk premium seems to be settling down already. The Polish government finished its requirements for 2016 early and has pre-financed a chunk of 2017 requirements, especially FX borrowing.

Meanwhile, the main risk factor for the Polish zloty in 2017 would be general risk sentiment towards emerging market as the Fed continues its tightening cycle, stated Commerzbank. Polish assets, especially local and hard currency long-end bonds, are over-owned as they act as a CEE proxy. This also signifies that if asset allocation towards emerging market or European bonds were to be scaled back, Poland might be affected disproportionately.

“We see EUR/PLN rising gradually to 4.50 in coming quarters and averaging that level through 2017”, added Commerzbank.