Zloty To Reverse

News that the zloty dividend had to a large extent been hedged by Dutch-based Eureko has helped the Polish currency recover from the 10-week lows against the euro reached earlier today near 4.30. The resolution of the PZU-Eureko dispute is seen as removing a negative. In addition, an economic advisor to Poland's president and a candidate for the central bank warned that the new board that will be in place at the start of 2010 will likely raise rates very early in it tenure: "almost at the start of its term".

Poland survived the crisis better than other EU countries and the central bank has signaled it planned to unwind some of the easing it has provided. In July and Aug, inflation was above the 3.5% upper end of the the central bank's inflation target range. That said, at the policy making meeting earlier this week, the central bank reiterated that inflation was more likely to ease than continue to rise, though they seem less convinced than they were.

One way to express a more positive view on the zloty, rather than selling the euro against it, is to sell the Czech krona against the zloty. The zloty has been declining against the krona since early Aug and in recent days has fulfilled a 61.8% retracement of its mid-June though early Aug 11% rally. Stops can be placed near CZK5.93 in anticipation of a move toward CZK6.20. It is currently trading just near CZK5.975

One advantage of trading the zloty against the krona is one is not going short the euro, in a generally weak dollar environment. And if there is some exceptionally poor news in the region, or for emerging markets in general, the intra-regional cross may provide some protection. Moreover, the Governor of the Czech central bank governor and the vice governor wanted to cut rates in Sept, but were overruled by the other five board members.