Czech Koruna Outlook (1-3 Month) – Commitment to floor

In its recent minutes, CNB emphasized again its dovish stance. Regardless of CNB stated dovishness, inflation and activity data found to be gradually improving. As previously noted, CNB stressed its commitment to the EUR/CZK floor of 27 through 2016 and the continuation of anti-inflationary risks. CNB referenced two factors as driving this risk - wages and the exchange rate. CNB is not expected to raise its koruna cap to a weaker level in the short-term, unless a significant event occurs, says RBC Capital Markets. 

In the past-month, EUR-CZK has traded within a range of 27.3 and 27.5. Second, data is showing signs of improvement. Recent headline inflation y/y increased for the second month in a row. April inflation y/y came in at 0.5%, which was higher than the previous month and a touch above consensus. Retail sales y/y has been increasing since November. Preliminary reading for 1Q real GDP y/y is at 3.9%. Third, a pick-up in Euro area's inflation and growth is likely to have a positive effect on the Czech Republic through external trade. 

"This is the case given the country's strong correlation to Germany's economy. A risk to the view is that deflationary pressures rise. In effect, this may push CNB to raise the EUR-CZK floor", adds RBC Capital Markets.