EUR/CZK ignores fundamental data, keeps approaching floor

Early last week, EUR-CZK was seen to move aggressively towards its CB-set floor of 27.00, ignoring near-term data such as worse-than-expected current-account for May, which brought the first negative reading in a year. 

Despite sporadic intra-day moves in the opposite direction, which could indicate CB intervention to defend the floor this theme continued on Friday, and EUR-CZK moved even lower to 27.04, this time despite dovish industrial price data. 

Czech export prices fell by 0.3% y/y in May, faster than the 0.2% y/y decline of April, and import prices turned flat vs. 0.5% y/y increase in April. By way of background, the floor of 27.00 was set in late-2013 with the aim of creating some inflation pass-through within a deflationary setting via the impact of FX on import prices.

However, Czech President Zeman expressed strong opposition to the FX floor earlier this year, following which the exchange rate gradually drifted lower, and latest price action resembles that of EUR-CHF late last year this makes it a risk spot within the region.

"There is always the possibility that speculators will get attracted to test CNB's resolve, and this would trigger disorderly volatility. However, the base-case is that CNB will defend the floor until it is time to end this policy in late 2016. CZK not being a major funding currency, may not see massive inflow pressure, which may be the crucial difference vs. CHF", says Commerzbank.