Unleashing the Potential: The Czech Koruna's Strong Stand and Market Expectations
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The Czech koruna reached essentially its strongest levels against the euro in history in 2Q and remains below EUR 24/CZK. However, the attractiveness of the koruna declined in May as the CNB hawkish story came to an end and attention shifted elsewhere in the region. We think the koruna still has a lot to offer - high carry, balanced market positioning and a central bank ready to intervene in the FX market if the koruna weakens. In addition, the CZK has by far the highest beta against EUR/USD in the region, making it a good proxy for a global story view with a high CEE carry element.
Financial markets are currently pricing in too much rate cutting this year. Thus, any central bank hints of rate cuts, which is not a topic for the CNB at the moment, or lower inflation numbers should not threaten the crown, unlike other currencies within the region. Moreover, in our base case scenario, we expect EUR/USD to rebound in the coming months, which should benefit the koruna the most in the region. This is also helped in many ways by a more balanced market positioning versus PLN or HUF, for example. Thus, we expect the koruna to stay in the current range of 23.50-24.00 EUR/CZK with trips to lower levels depending on the global story.
FX – spot vs forward and INGF
CNB FX reserves declined but remain significant (€bn)
Fixed Income strategy
The financial markets are pricing in a first 25bp rate cut in September and 95bp overall this year, while we see room for only one or at most two 25bp rate cuts this year. Thus, we think the market has gone too far and the CNB meeting should be a reminder of CNB hawkishness despite lower inflation numbers, which are not sufficiently low for the central bank yet. Overall, we see the market calling for an upward correction in rates.
Foreign holders of CZGB (%)
CZGBs issuance (CZKbn)
