The Polish Supreme Court has so far presented a balanced take on the FX mortgage saga. Hence risk of imminent settlements including conversion of credits into PLN has diminished. The market seems to have priced it out as well. Hence we expect a gradual €/PLN decline, on the back of the domestic macroeconomy
The European Court of Justice, which is typically the very pro-consumer, left the FX mortgage dilemma for local courts. This means the Polish Supreme Court should have the key say. So far it has presented a balanced approach, i.e. saying that claims of banks and customers are independent and cannot be met. More importantly, the Supreme Court also defined that the limitation period for counterclaims is calculated from the date of credit annulment not from the date of credit origination. That has important implications for both sides, as banks can still expect capital returns from clients, while clients can still expect that banks return all instalments paid (and not only those from last 10 years). That limits the banks losses significantly.
Based on our estimates the market has already largely priced out any risk to PLN related to the mortgage saga. Our relative value model gauges €/PLN equilibrium based on other market variables (swaps, money market rates, etc.). It indicates a level just below 4.50, hence not far from the current level, less than 2% of undervaluation. In March, at the peak the undervaluation reached around 4%. Much of the undervaluation of the zloty, particularly in March, likely resulted from the biggest creditor closing its FX position related to FX products in a relatively short time, reportedly around 4 months.
The zloty and other CEE currencies showed significant negative correlation to US$ in the past months. Hence should a market correction translate into a stronger dollar, this would be PLN negative. The zloty may also underperform other CEE currencies. Despite the NBP turning less dovish, the Czech National Bank in particular will most likely push much more for normalisation, likely hiking in 3Q21 already. This again makes PLN a prime candidate for shorting in the region.