CZK: Rate Eases Towards Cycle Lows, Market Ponders Tale Of Two Stabilities

PLN/CZK has traded on a heavier footing today, in the interim between the CNB and NBP monetary policy decisions. The pair last deals at CZK5.0313, down 84 pips on the day, narrowing in on Jan 26 cycle low of CZK5.0241. A clean break here would open up Oct 7 low/psychological figure of CZK5.0097/5.0000. Supporting the bearish case is the recent 50-/100-DMA crossover as well as the fact that the rate operates above its lower 2.0% Bollinger band, which suggests that the move is not overextended. Bulls need recovery past Feb 2 high of CZK5.0813 to get some reprieve before targeting Jan 11 high of PLN5.1372.

• 10-year POLGB/CZGB yield spread has widened in the recent days, since printing cyclical narrows on Jan 30. This brings the differential to levels last seen more than a week ago.
• The CNB left its backstop against Koruna depreciation in place last week, with short-end EUR/CZK implied volatilities faltering in reaction, as some speculated that the central bank might ditch its commitment to FX stability, which is effectively a pledge to prop up the CZK if needed.
• Otherwise, the CNB voted 5-2 to leave interest rates unchanged, in line with universal expectations, with Governor Ales Michl warning that they could stay higher for longer. His message was echoed by multiple colleagues from the Bank Board.
• By contrast, NBP Governor Glapinski said after the January meeting that Poland's central bank will lower interest rates "as soon as possible," which he hopes could be near the year-end. This was despite majority of the MPC members advocating rate stability, just like their Czech peers.
• Wednesday's NBP monetary policy decision and Thuirsday's press conference with Governor Glapinski may shed more light on the local rate-setting panel's collective bias compared with the CNB's "higher for longer" messaging.
• The market continues to price rate cuts by the end of this year by both the NBP and CNB. The coming meetings of the two Central European central banks may bring more clarity on the relative rate path.