CZK: Dovish Data May Cap CZK Rally, But Global Risk Sentiment Remains Key

While incoming data supports the case for a continuation of 25bp rate cuts, potentially capping the CZK's recent rally, global risk sentiment will remain the primary near-term driver for CE3 FX given the close proximity to the Sept FOMC.

• CZK outperformed HUF and PLN at the beginning of August, as a rally in JPY and unwind of popular carry trades weighed more heavily on the latter two currencies. CZK was resilient in that particular phase of risk-off, when growing expectations of the start of a Fed easing cycle prompted a sharp narrowing of the US/Czech rate spread (see chart). This underpinned CZK outperformance through the rest of the month, with the koruna spot gains vs. EUR leading its peers (CZK: +1.11%; HUF: +0.86%; PLN: +0.48%).
• CNB hawkishness will have played a part in robust CZK performance. The central bank reduced the pace of easing to 25bps at the Aug 1 meeting, while also presenting a significant upward revision to the rate path.
• Since then, GDP growth has come in above expectations in Q2 (+0.6% y/y vs. +0.4% exp), bolstering the case for the CNB to maintain its self-proclaimed “hawkish” tone at the meeting on Sept 25.
• But at the same time, data has also shown that average monthly wages were below-expectations in Q2, alleviating concerns of officials and potentially cementing bets of further 25bp easing moves. Meanwhile, government ministers confirmed that public sector employees are to receive a salary rise of 7% in 2025 - below initial demands for a 10% increase.
• The more dovish data has been reflected by a ~2bp dip in CZK 12x15 FRAs this month. Indeed, we think that although the CNB has said it will proceed with caution, recent data should facilitate 25bp cuts at the remaining 2024 meetings, with risks skewed towards a pause at Dec meeting.