CZK: Czech National Bank's Last Chance to Signal Hawkishness

CZK: The CNB's last chance to send a hawkish signal

There is only one event on the calendar today in the CEE region and that is the meeting of the Czech National Bank. A rate change is not on the table this time either, in our view. However, we think it should be one of the most interesting sessions this year. Firstly, rapid disinflation opens up the question of a first rate cut; secondly, the weak koruna in turn raises the question of FX intervention and the postponement of rate cuts; and thirdly, the CNB will release a new forecast which may be the central bank's last attempt to reverse very dovish market expectations.

The Czech koruna has erased some losses in recent days but it seems to have been more related to the rebalancing of bonds within the GBI-EM index than due to any CNB hawkishness. So yesterday the koruna closed slightly below 24.0 per euro, which we believe is the pain threshold for the central bank. We believe that the CNB will try to support FX somehow given that it has become the pillar of monetary policy over recent months. The market is not buying into CNB hawkishness very much and so today's unveiling of the new forecast is likely to be the last chance to fight the market's dovish expectations. Financial markets are pricing in roughly 115bps of rate cuts this year, while we see 50bps in total in two steps in November and December. We think the CNB will try to paint a similar picture, which should support the koruna closer to 23.80 EUR/CZK.