• Forward-rate agreements show traders scale back rate-cut bets
  • Government bonds gain as Morgan Stanley reiterates overweight

The zloty rose as a measure of Polish manufacturing output expanded more than forecast, prompting traders to cut bets the central bank will lower interest rates.

The currency appreciated 0.2 percent to 4.3384 per euro at 3:15 p.m. in Warsaw, heading for the highest close since Jan. 5 and extending a gain of 1.7 percent in February. The zloty is still down 1.8 percent year-to-date after tumbling to a four-year low in the aftermath of a downgrade in January by Standard & Poor’s.

Polish manufacturing accelerated after gross domestic product grew more than double the pace of the neighboring euro area in the fourth quarter. Six-month forward-rate agreements narrowed to 26 basis points below the Warsaw Interbank Offered Rate, from 28 basis points yesterday, indicating traders are expecting little more than a quarter-point cut in Poland’s benchmark interest-rate of 1.5 percent by September.

“The risk premium that rose so much after the S&P downgrade is now declining,” said Piotr Kalisz, chief economist at Citigroup Inc.’s Polish unit. He expects the zloty to end the year little changed between 4.3 and 4.4 per euro. “Investors are slightly less afraid of further downgrades and growth is strong compared to other countries.”

ECB Measures

The zloty is also getting support from expectations the European Central Bank will increase monetary stimulus next week that could help boost inflows into the country’s assets, according to Commerzbank AG.

Poland’s manufacturing PMI rose to 52.8 in February from 50.9 in the prior month, beating a median estimate of 50.6 in a Bloomberg survey, according to Markit Economics. The economy grew 3.9 percent from last year in the fourth quarter, the statistics office said on Monday.

The yield on the country’s 10-year zloty bond fell one basis point to 2.95 percent, while the premium investors demand to hold the notes over similar German bunds fell from a three-week high to 281 basis points. Local government debt was the best performing in central and eastern Europe during February, according to data compiled by Bloomberg.

Morgan Stanley reiterated its overweight stance in zloty government bonds on Tuesday, targeting 2.7-2.8 percent yield for 10-year notes. Deutsche Bank recommended on Monday to buy the zloty targeting 4.25 per euro as the currency’s “sojourn into risk currency territory is likely over.”

The zloty is supported by “the domestic economic story coupled with the supportive vibes coming from the European Central Bank’s dovishness,” said Simon Quijano-Evans, the chief emerging-market strategist at Commerzbank in London. Commerzbank sees the zloty appreciating to 4.25 per euro by the end of 2016.

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