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Clear And Confident CNB Has Led to Lower Volatility in FX/FI Markets

CZECHIA
  • Even though the USD strength since the beginning of June has been pushing USDCZK gradually higher in recent weeks, pressure on the CZK has been lower than in other CEE countries (i.e. Poland, Hungary).
  • As opposed to Poland, which is trying to keep interest rates low in order to stimulate the economic recovery, the CNB has started a tightening cycle last month and is expected to raise its benchmark rate by another 25bps to 0.75% at its next meeting on August 5.
  • CPI inflation has been decelerating slightly in the recent two months and is currently standing below the 3% CNB upper tolerance band.
  • Even though inflationary pressures are expected to remain elevated in H2, the start of a tightening cycle could limit the downside risk on the Czech koruna.
  • Implied volatility in the Czech bond market has also been significantly lower relative to Poland or Hungary in recent months.
  • The 10Y yield is currently trading slightly above its 50DMA at 1.70%; a break below that level would open the door for a move down to 1.60%. On the topside, first resistance stands at 1.78% (100DMA), followed by 1.85%.
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