FxWirePro: Hype or reality? Euro vols begin to soar – Uphold EUR/PLN call spreads on modest bearish Polish zloty

The above diagram explains 1m implied volatility with a forward start of 15 April (i.e. just before the commencement of French presidential elections) for a number of currency pairs.

While G7 currency pairs, including EURUSD, EURJPY, and EURCHF have been moving higher in anticipation of French election risks, EURPLN and EURHUF implied volatility has been grinding lower.

We are modestly bearish PLN against EUR over the medium term. The zloty is currently around fair value, but with a little premium for risks from the potential conversion of FX mortgages and foreign divestment from the banking sector. While growth has been robust lately, the market already prices in more rate hikes than JPM's economists over the next 2 years and thus further support from expectations of tightening monetary policy is limited from current levels.

Polish full-year 2016 growth was reported at 2.8% y/y last week, from which we infer that growth was broadly stable at 2.5%oya in 4Q. This would nonetheless imply a strong pickup in sequential growth to 4.5%-5%q/q, saar from 0.8% in 3Q16. IP and construction output expanded robustly in 4Q16 (6.9% q/q, saar and 18.5%, respectively) while retail sales also rebounded (12.7%). The expenditure-side details available for full-year 2016 suggest that private consumption remained solid, expanding around 4%oya in 4Q, while the contraction in fixed investment eased only marginally.

Initiate longs in a new EURPLN 2m call (4.35), spot ref: 4.3090.

We think it is, therefore, attractive to buy EURPLN call options at current levels, as CEE is vulnerable to contagion from political anxiety in Europe.

EURPLN is close to fair value on our valuation models, and we think the zloty will struggle to rally from current levels.