CNB may have to intervene to maintain EUR-CZK floor

CZK has already been under strong appreciation pressure from Greek developments, and this is set to intensify now: EUR-CZK broke sharply lower towards its 27.00 floor last Friday, matching the trend in the other major 'safe haven' currency in the region, EUR-ILS. 

In view of Greek developments, it appears likely that CNB will have to intervene in coming weeks to defend its EUR-CZK floor of around 27.00. Last week's CNB board minutes were markedly more hawkish than previous minutes: the bank's board noted that Q1 GDP had exceeded expectations and that this trend would likely continue through 2015; the output gap is gradually closing, which in conjunction with the improving labour market has removed deflation fears, states Commerzbank. 

The board assesses the risks to its current forecasts as "balanced" - but, it notes that any further positive surprise from manufacturing data will create inflation risk to the upside. 

"This combination of a more hawkish central bank and safe haven inflows is likely to exert further downward pressure on EUR-CZK, possibly requiring defence by CNB, although we expect the 27.00 floor to hold", says Commerzbank.