Why I Like Poland

There are two considerations that commend the Polish zloty--fundamentals and technicals.

The zloty had sold off against the euro as the euro declined against the dollar. This was partly a function of unwinding risk trades, but also recall that in late Q1, the Polish central bank intervened in an attempt to slow the zloty's rise.

That was then and this is now. After the tragic accident earlier this year, Poland has a new central banker. Marek Belka, a former prime minister, and previously held senior posts at the IMF and United Nations brings gravitas and credibility to the position.

Poland received a $20.6 bln flexible credit line from the IMF last year. There had been some internal debate over the whether to extend the credit line. The appointment of Belka would seem to make a extension of the line more likely. This is supportive for the zloty in general as means that Poland is somewhat better positioned for renewed pressures emanating from the capital markets.

The deputy finance minister was speaking today and was quite explicit. Fundamentals, he argued do not justify a weaker zloty. This has helped strengthen the zloty to its best level against the euro in more than a week.

Tomorrow Poland reports May CPI figures. A consensus 0.4% rise on the month would be sufficient for the year-over-year rate to ease to 2.3% from 2.4%. However, the base effect works against Poland in the second half of 2010 because in the second half of last year, Poland had a cumulative monthly increase of 0.4%, with two negative monthly readings and one flat one. As the year-over year rate ticks up, Poland's central bank may see a firm zloty as being even more desirable.

The middle of the week sees Poland's current account. The deficit may widen out a bit, even though the trade deficit may narrow. More importantly on Wed, Poland will be selling PLN1.5-3.0 bln of 10-year bonds.

Technically, the zloty also looks good. Today the five day moving average for the euro is falling below its 20-day moving average for the first time since mid-April. It is sitting now on the 200-day moving average (PLN4.0650). Technical indicators like the MACDs are rolling over. There is near-term potential toward PLN4.0350. Over the slightly longer term, a test on the PLN3.92-PLN3.95 is reasonable, assuming a somewhat supportive international environment.