Speculative accounts were caught short last week as the Polish zloty gained against the euro. Hedge funds and commodity trading advisors had been short the zloty in the run up to Poland's Sept. 23 election, but the currency started gaining against the euro early last week, prompting players to rush and cover shorts and send the zloty stronger still.
Once the zloty started strengthening, fx dealers and players were not sure where it would stop. "It moved pretty quickly through some key barriers," said one trader, who said PLN4.00 and PLN3.95 had been substantial supports for the single currency against the zloty. By last Thursday, however, the currency pair had stabilized at PLN3.92. One-month implied volatility remained higher at 10%, compared to 9.3% the previous Friday. Traders said demand for zloty calls had eased off by the end of the week, with most speculative players looking to gain exposure to one-month volatility through any derivative strategy, although straddles proved popular.
Caio Natividade, emerging markets strategist at Deutsche Bank in London, said the zloty, as well as the Polish interest rate curve, has a habit of over-pricing the risk premium in the run up to market events such as elections, only to re-price one or two weeks before the event. A similar situation occurred before the French and Dutch referendum votes, he noted. But much of the activity on the currency pair is likely to be over. "It's now in line with our expectations," said Natividade.
