EUR/CZK likely to gradually decline to 25.50 by the end-2017, says Commerzbank

The EUR-CZK spot exchange rate has declined sharply over the past week, breaking below the 26.50 low it set on 10 April, a few days after CNB abandoned its FX floor. A few factors were responsible. First, the Czech current-account surplus for March came in better-than-expected, driven by healthy export performance, something we have witnessed for euro zone majors such as Germany in March, and also for Poland.

Secondly, a just concluded IMF mission issued a concluding statement which reminded markets that rate hikes could be on CNB's agenda at some point. The IMF mission warned CNB not to raise rates too soon though, and advised a cautious, data-driven approach; still, it highlighted overheating credit growth and gave the general impression that the economy has normalised enough that rate hikes will soon be called for.

The CNB is not expected to hike its benchmark rate this year, except perhaps a one-time adjustment to 0.25 percent from the present 'technical zero'. Further, the CB board already considers the medium-term inflation outlook to have turned softer than it had imagined just a quarter ago; our own view is that euro zone core inflation will remain subdued this year, and that Czech inflation, too, will moderate again this H2.

"We expect EUR/CZK to gradually decline to 25.50 by the end of 2017, but we do not expect continued downward momentum in the near-term driven by talk about rate hikes," Commerzbank commented in its latest research report.