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CNB Meeting: Risk Reward Is Skewed To CZK Weakness

CZECHIA
  • Momentum on CZK has remained firm ahead of the CNB meeting today (1.30pm), with EURCZK breaking below its 24.20 support and gradually approaching its psychological level at 24.
  • Even though preference for the CZK should continue to grow in the medium term with traders chasing the interest rate differential, the risk/reward is skewed to CZK weakness following recent koruna appreciation ('buy the rumor, sell the fact').
  • Our base scenario is a 75bps hike (market consensus) with a 75% probability, which could lead to some CZK consolidation, with EURCZK retracing higher towards today's high 24.23.
  • There is a 20% change that CNB disappoints this time with a 50bps hike as more and more policymakers seem to be aware that hiking rates too aggressively could lead to a sharp downward revision in growth expectations. A lower hike would lead to further CZK retracement with EURCZK consolidating towards 24.30
  • The probability of a 100bps hike is 5%. Even though CEE policymakers have generally surprised positively (delivered more aggressive hikes) in the past few months, the chances of another aggressive 100bps hike are low this time. Such as move could push EURCZK below the 24 level.
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