CZK: Czech Koruna Softens, CNB Monitors Pain Threshold and Potential Rate Cuts

CZK: Koruna remains above CNB pain threshold

The Czech koruna softened yesterday to its weakest level since the beginning of the year, with EUR/CZK surpassing the levels of the March sell-off during the Silicon Valley Bank turmoil. We believe that the main reason for this is still the week-old comment by the Czech National Bank (CNB) deputy governor regarding the expected weakening of the koruna, with the market betting on the end of the quasi-commitment. However, as we mentioned earlier, we do not see this intent in the central bank's commentary. On the contrary, we think the CNB must be unhappy about the current EUR/CZK levels. For the bank board, strong FX has been the basis of communication for a long time and therefore we think 24.00 is the pain threshold for the central bank.

Thursday marks the start of the blackout period ahead of the August meeting and hence we can expect with a high degree of certainty the release of the board members' interviews or statements today or tomorrow. We expect the board members to attempt some pushback against a weak koruna and also a very dovish market pricing. In our view, it is the weak koruna that may be a reason for the board to delay rate cuts this year. In the meantime, however, if EUR/CZK moves higher again we expect the CNB may enter the market earlier than what used to be the usual intervention level last year, i.e. 24.60-70 EUR/CZK.