Poland and Mexico are in the possibly enviable position of being seen as relatively safer bets in an emerging market asset class that overall is expected to underperform developed markets. Indeed, neither are classed among the "fragile five" (or more) emerging markets, both have used earlier better times to make progress on reform agendas and both benefit from geographical proximity and economic linkages to recovering developed markets.
In this analysis, we focus on exchange rates and compare PLN/MXN with EUR/USD. The intuition that Poland and Mexico can be seen at least in part as leveraged plays on their respective developed market neighbors is borne out by the relative performance of PLN/MXN and EUR/USD.
|USD/PLN is near lows for the past year, while USD/MXN near highs...||... but PLN/MXN has tracked EUR/USD fairly closely|
The recovery in Poland appears in better shape than that in Mexico, which provides some justification for a relatively stronger zloty. GDP growth in Poland last year was above expectations at 1.6%, although CPI inflation remains below the NBP target, and at its most recent policy meeting, the Central Bank maintained its view that rates should be kept unchanged for H1 2014 to support the recovery. In contrast, GDP growth in Mexico remains weak at 1.1% for 2013. CPI inflation is starting to fall after the one-off impact of taxation changes last month, and market expectations are that Banxico will turn more dovish in the coming months.
While monetary policy remains dovish for the moment, risk appears to be on the side of a rate hike in Poland coming before a rate hike in Mexico which, other things equal, could benefit the zloty over the peso. We would argue, however, that this is in contrast to the Fed and ECB, where risk may be on the side of the Fed tightening faster than expected, while the ECB continues to ease.
Despite volatility in FX markets, daily changes in PLN/MXN and EUR/USD have been relatively well-correlated over the past year, at least for the larger daily moves, although this is more apparent when considering weekly moves. Direct comparison of the most recent price action, however, suggests that PLN/MXN has moved higher than would be expected given the current level of EUR/USD. Indeed, this overshoot in PLN/MXN could look increasingly out of line if you also believe, as we do, that EUR/USD itself will struggle to move significantly higher from here. In the coming weeks and assuming a stable EUR/USD, we target a retracement to around 4.30 for PLN/MXN, although this would likely extend further if EUR/USD starts to fall.
|Changes of PLN/MXN and EUR/USD relatively well-correlated||PLN/MXN higher than it has been historically for current level of EUR/USD|
Data source: oanda.com