We see long USD/PLN as a great risk to reward trade – since our last article, we have seen significant upside and expect more to come.

The economic fundamentals point to more upside in USD/PLN but we could see a major move due to the possibility of direct involvement in the Russia-Ukraine war by Poland

“Inflation is sufficiently close to the 10% YoY mark, while the real economy is proving much weaker than markets had anticipated. As a result, it is quite likely that NBP will kick-start its rate-cutting cycle in September with a 25 bps reduction.” (COMMERZBANK)

An Economic Slowup

The economy is weaker than expected as the eurozone slows up and this has a major impact on Poland “Retail sales join a list of disappointments in recent data readings on the Polish economy after less than stellar industrial production and labor market numbers yesterday.” (ING)

Real retail sales of goods fell 4.7% year-on-year in June (consensus: -5.0%), following a 6.8% YoY decline in May. The weak economy and inflation moving back to single digits will probably see the MPC start interest rate cuts after the summer in September The 2Q23 GDP was worse than forecast in the July NBP projection (-0.1% YoY), and the outlook for 2H23 is also seeing increasing downside risks. Also the huge influx of refugees from Ukraine more than 1.5 million is straining social services and more could follow in the coming months

Interest Rate Outlook Cuts Coming

The MPC as noted earlier will probably cut interest rates by 25bp in September. At present the rate is 6.75% and interest rates have been the main reason that speculators have built up a big USD short position. The 25bps rate cut will be followed by far more cuts in our view.

Capital Inflows to Dry Up

Poland as an emerging market also heavily relies in capital inflows and these are expected to slow up as the EU and global economy slow up.

We expect the USD to rise on the Zloty on the economic fundamentals but there is a wildcard that could come into play and extend the USD rally significantly to the upside.

Russia-Ukraine War – Poland to Intervene?

If you read the mainstream media you would think Ukraine was winning the war but there is not – it should be obvious from the fact that Ukraine has failed to get even near the first major Russian lines of defense in the much-vaunted counterattack taking just a few hundred square kilometers of the 90,000 + that Russia controls in terms of land in Ukraine.

Independent estimates put Ukraine losses at around 45,000 in the latest assault and over 400,000 KIA since the war started - So what happens next? Russia has more men around 750k on the ground in Ukraine and 300k in reserve. Russia has better equipment and more of it than Ukraine and the Russian forces are well integrated. Ukraine has lost most of its NATO-trained troops 40k of around 50 - 60k and the troops that remain (around 300k) are mostly conscripts and lacking the heavy equipment they need - so will the Russians now attack the West?

Now Ukraine is exhausted, it's highly likely and If they do, Poland has already said it may intervene independently of NATO to help Ukraine probably with Lithuania. "Either Ukraine defends its independence today, or we have to enter this conflict. Because our main values, which were the basis of our civilization and our culture, will be threatened. Therefore, we will have no choice but to enter the conflict," (Polish Ambassador to France Jan Emeryk Rosciszewski) There have been other statements from Polish officials as well. West Ukraine used to be part of the Polish empire and Poles would see intervening as a way to stop the whole of Ukraine from falling under Russian control.

If  Poland were to put troops directly into Ukraine we would have Poland in direct conflict with Russia. Russia would be highly likely to attack due to its objectives in terms of the so-called "Special Military Operation" which is to make Ukraine a neutral state. Any direct intervention would mean a huge hit on the Zloty - so what are the odds of this happening? We dont see it as highly probable but it's certainly possible so the scenario is worth keeping in mind.

Technical Analysis

Our view of the key technical levels to look out for, are on the daily and monthly charts below.