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On the back of formidable economic data and the improved outlook for both domestic and foreign demand, we have revised our calls on GDP dynamics, the labor market, CNB policy, and the financial markets. We now expect two CNB hikes in 2017 (on 3 August and subsequently in 4Q’17), and three more hikes in 2018. The koruna is set to appreciate to EURCZK 25.70 in 3Q’17 and to EURCZK 25.00 by end-2018.
CZK is around 5% undervalued based on our BEER and FEER models. While the already long CZK positioning may prove a hurdle for short-term appreciation (the latest JPM Client Survey shows investor longs remain at record highs), we think the currency will find support from a central bank that is gradually turning hawkish.
We continue to hold shorts in EURCZK forwards exchange contracts of 27-Nov-17 expiries. The call is revised our end-2017 EURCZK forecast up to 25, given the lower than expected volatility of the currency post floor removal.
Further robust domestic macroeconomic performance and a forthcoming CNB rate hiking cycle reinforce our bullish koruna stance. The koruna has steadily appreciated against the euro since the start of May (following the exit of the EURCZK floor on 6th April), briefly trading below 26.00 this week (refer above diagram). We expect further appreciation of the currency and hold existing allocations and trades.
