Risk Reward on CZKPLN Skewed To Downside Amid Slowly Growing MP Divergence

• In the past 18 months (until May), the political divergence between Czech Republic and Poland combined with the MP divergence between CNB and NBP have led to preference for the CZK relative to PLN.
• CZKPLN surged from a low of 0.1634 in October 2020 to a record high of 0.1947 in early March (2022) in the aftermath of the Ukraine war.
• However, we saw the recent changes in the CNB board with the election of Michl as a new Governor (effective in July) and the new CNB members (more dovish) could balance the board and result in an early ‘exit’ of the tightening cycle.
• Hence, CZK remains vulnerable relative to other currencies where central banks have not hinted the market that the tightening cycle is about to end and will continue to fight against the elevated inflationary pressure by delivering further hikes.
• Therefore, the risk-reward on the CZKPLN is skewed to the downside in the medium term.
• The MT chart shows that momentum still looks bullish on the pair, after CZKPLN rejected its 200DMA several time in the beginning of the month.
• Investors will carefully watch the 0.1850 – 0.1855 support zone; a break below that level would indicate the start of a 'bearish' retracement and would open the door for a move down to 0.1827 (38.2% Fibo of the 0.1634 – 0.1947 range).
• CZKPLN is currently testing its key ST resistance at 0.19; next level to watch on the topside stands at 0.1918.
• Geopolitical uncertainty remains the major risk of PLN though, as we have seen that Poland and Hungary have been particularly more sensitive to the Russia/Ukraine developments.

Source: Bloomberg/MNI