CZK's uncertain path amid deflationary pressures and market expectations

CZK: Lost in translation

Today's calendar in the CEE region doesn't have much to offer. In the Czech Republic, PPI numbers will be released as the last interesting print before the August Czech National Bank (CNB) meeting. PPI has been in deflationary territory for some time, and the more interesting part of the print may be agricultural producer prices. These have been indicating a significant drop in food prices for some time, which should show up in the CPI in the near term as well. Next week, Thursday starts the blackout period and we can expect more active board members in the media these days. While the market is pricing in roughly 120bp of cuts in CNB rates this year, we believe the central bank wants to see much more before the first cut and will wait until November with the risk of delaying until the first quarter of next year to be sure inflation hits the 2% target. We therefore expect the governor to try to fight market expectations again at the August meeting.

In the meantime, yesterday's comments for the budget committee in parliament on expectations of a weaker koruna pushed EUR/CZK from 23.750 to 23.850, with the end of the CNB's FX quasi-commitment in sight. We believe the meaning was lost in translation, but this is not good news for the koruna. Given favourable global conditions, we believe the weakening of the CZK was just yesterday's story, however further weakness could push the CNB to be more hawkish and delay rate cuts even further.