The Russian import ban on certain food and farm products has raised concerns about deflation in Eastern Europe. Poland and Hungary are already in deflation and the Czech Republic is slowly moving in that direction.
We expect low inflation (deflation) to force the respective central banks to ease monetary policy. This would intensify the pressure on the three currencies over the coming three to six months.
We have a significantly more bearish view on the PLN, HUF and CZK than the market and we expect larger sell-offs than consensus and also larger sell-offs than the forward markets are pricing in.
We recommend that companies with PLN-, HUF- and CZK-denominated income hedge their FX risk via forward contracts.
Companies with expenses denominated in the above currencies should hedge via option strategies that maintain a profit potential if the EUR exchange against the PLN, HUF or CZK increases. Specifically, we recommend hedging HUF- and CZK-denominated expenses via forward extras while PLN-denominated expenses should be hedged using risk reversals.
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