Koruna Extends Rally Post-CNB, Then Pulls Back

The Czech Koruna extended its pullback from session highs (CZK23.813) as the CNB announced their widely expected decision to keep interest rates unchanged and continue to prevent excessive swings in the exchange rate.

• The Czech central bank has been keeping a lid on EUR/CZK via interventions in the FX market since May. Most of the Bank Board members have voiced their support for the existing regime, noting that it serves as a buffer against imported inflation.
• The consensus view was that the CNB would keep the current FX regime in place, albeit some have flagged the risk of it being dropped today, as the Koruna trades near multi-year highs, which has reduced the need for central bank support to zero.
• EUR/CZK has now moved away from post-CNB lows and last trades +0.006 at CZK23.785. It is stabilising around these levels, in contrast with EUR/PLN and EUR/HUF, which have now resumed losses and are touching new session lows.
• CZGB yields have been broadly unfazed by the CNB decision after dropping in line with regional trend, with bull-flattening impetus evident.
• The focus now turns to a press conference with Governor Ales Michl.