Czech National Bank likely to have intervened more in August to defend EUR/CZK floor at 27

The Czech National Bank’s latest balance sheet data implies that the central bank has had to intervene more in recent weeks in order to defend the EUR/CZK floor at 27, said Commerzbank in a research note. The preliminary weekly data indicated that the Czech National Bank’s reserves rose by around EUR 2.4 billion in August. Out of this, around EUR 433 million is due to official EU fund inflow; however, the rest might show huge foreign exchange market intervention.

A solid EM rally in August took place and therefore it is not unexpected that the CZK is seeing appreciation pressure that made the central bank intervene. However, the CNB is increasingly hinting at exiting FX targeting on schedule around mid-2017, noted Commerzbank.

But, inflation is at just 0.6 percent currently, while monetary policy relevant inflation (tax adjusted) is 0.4 percent. In the previous week, data indicated that prices dropped 0.2 percent month-on-month in August, below expectations of 0.3 percent rise. With inflation below target, the Czech National Bank’s hawkish stance rises market speculation that the central bank might have decided to leave the floor regardless of the inflation trend, stated Commerzbank.

Such speculation definitely puts additional pressure on the floor. The Czech National Bank is expected to address the issue during its September board meeting.

“For the time being, we do not anticipate any crisis, and EUR/CZK is likely to drift around 27.02”, added Commerzbank.