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Commerzbank on CZK Strength

CZECHIA
  • The Czeck koruna has surprisingly and abruptly appreciated in recent days – with EUR-CZK dropping sharply from its erstwhile 24.70 level towards 24.30 – a diametrically opposite move compared to its CE3 peers, the Polish zloty and the Hungarian forint. The latter have weakened noticeably in line with the euro itself.
  • What is more, this move occurred against the background of an anticipated ‘hold’ phase for the Czech National Bank over July and August while inflation has continued to surprise to the upside.
  • Yesterday’s June CPI data were 2pp ahead of CNB’s monthly forecast, with core inflation accelerating to a heady 14.6% which now makes the Czech real interest rate the most negative in peer group (-7.60pp).
  • Question marks earlier arose about CNB’s policy response function under new governor Ales Michl. Can CNB still freely hike rates? This controversy saw CNB having to intervene in the FX market to the tune of EUR 8.5bn during May and June in order to keep the koruna stable. So, what would explain this uncharacteristic sudden currency strength?
  • Readers should be alert to the possibility that CNB may be intervening with even more force now in order to drive EUR-CZK down. The reason why this is possible is that the new governor has expressed support for FX intervention as a tool to counter globally originating inflation pressure.
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