Koruna Stays Calm Despite Drop In Czech FRAs After CNB Comments

EUR/CZK inched higher as a fresh round of CNB speak crossed the wires, albeit remained wary of testing its previous session highs of CZK23.515 and eased off. It now deals at CZK23.479, little changed on the day, with bulls keeping an eye on the 50-DMA (CZK23.583). Bears look for a sell-off towards Apr 14 low of CZK23.207.

• CNB Deputy Governor Zamrazilova explicitly put a September rate cut on the table, noting that it would have to be clearly justified by data. She had earlier said that the CNB could lower interest rates if inflation reaches single-digit levels, while the CNB has a positive assessment of Q2 wage and household consumption data, which will only be published in September.
• Her colleague Jan Kubicek, a relative newcomer to the Bank Board, noted that monetary policy is restrictive enough now, but a switch to rate cuts may take longer than many expect. Kubicek noted that it should be clearer in the summer if more tightening is needed or how long rates will stay on hold, while flagging that the absence of budget consolidation would be a hawkish risk.
• Worth noting that both policymakers emphasised the importance of exchange-rate strength in the CNB's strategy. In addition, Kubicek noted that he does not see the Koruna as fundamentally overvalued, while the existing FX regime could remain in place even after the CNB eventually starts cutting rates.
• Czech FRAs have extended losses after these comments, with some presumably wrong-footed by Zamrazilova's remarks, given her recent pushback against overly dovish market pricing. 9x12 FRAs are hitting two-week lows, with losses evidence across the curve, as most contracts have now unwound monthly gains.
• CZGB curve has bull flattened, with yields sitting 3.3-10.2bp lower as we type. The PX index is ~0.1% better off.