Polish Zloty: A Contrarian Play as the NBP Pivot Approaches

The Polish Zloty (PLN) has been a resilient performer in 2025, buoyed by persistent inflation and the National Bank of Poland's (NBP) hawkish stance until recently. However, the tides are turning. With inflation decelerating sharply and the NBP embarking on its first rate cut cycle in 18 months, the PLN now presents a compelling short opportunity for contrarian investors. Here's why positioning against the zloty now could yield significant rewards as the central bank pivots.

The Inflation Catalyst: Disinflation Opens the Door to Easing

Poland's April 2025 inflation rate fell to 4.3% year-on-year, marking the lowest level since August 2024. Core inflation, excluding volatile food and energy, dropped to 3.4%, signaling a durable slowdown. The NBP's May 7 decision to cut its reference rate by 50 basis points to 5.25% was a watershed moment, ending a prolonged tightening cycle that began in 2021. Analysts now project three more cuts by year-end, potentially dropping rates to 4.5% by December.

This shift is critical: central banks typically ease rates when inflation is under control, which weakens currencies as carry trade demand wanes. The NBP's own forecasts suggest inflation will fall below 3% by July 2025, accelerating its path toward the 2.5% target.

Why the Zloty is Overvalued Relative to Peers

While the PLN has held steady against the euro (+1.2% YTD), it lags peers like the Hungarian forint (+5.7% YTD) and the Czech koruna (+3.3%). This divergence is unsustainable. Key reasons for PLN overvaluation include:

1. Delayed Rate Cuts: Emerging markets that eased earlier (e.g., Turkey, Brazil) saw their currencies stabilize or rebound. Poland's lagging easing cycle leaves the PLN vulnerable.
2. Fiscal Risks: Public debt is projected to hit 57.7% of GDP in 2025, up from 49% in 2020. Rising deficits may force the NBP to prioritize debt management over rate cuts, prolonging the easing cycle.
3. Geopolitical Drag: U.S. tariffs on Polish steel and EU energy policy shifts could disrupt export-driven growth, further weakening the currency.

Contrarian Edge: Betting on the Inevitable

Near-term stability masks the longer-term risks. Here's the contrarian case:

• Rate Cuts Ahead: The NBP's dovish pivot ensures at least 100 basis points of easing by mid-2026, reducing the PLN's yield advantage.
• EM Currency Dynamics: EM currencies typically underperform during Fed tightening cycles. While the Fed is pausing now, any resumption of hikes would amplify PLN weakness.
• Market Sentiment Lag: Investors still price in NBP hawkishness. By shorting now, you capitalize on the eventual realization that easing is inevitable.

Risks and the Exit Strategy

The primary risk is unexpected inflation spikes, though the NBP's core metrics suggest this is unlikely. A stronger-than-expected rebound in Polish exports or a sudden EU fiscal boost could also support the PLN. Monitor the July CPI report and NBP's September meeting for clues on easing speed.

Position sizing is key: allocate 5-10% of a portfolio to a short PLN position via futures or ETFs like FXPL. Set a stop-loss +5% from current levels, with a target of -10% against the euro over 6-12 months.

Conclusion: The Zloty's Time to Fade

The Polish Zloty's recent stability is a mirage. With disinflation solidifying the NBP's easing path and structural risks looming, now is the time to position against the PLN. This contrarian play offers asymmetric upside: limited downside near-term but substantial gains as the central bank's pivot unfolds. Act now—before the crowd catches on.