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FxWirePro: Stay short hedge in EUR/CZK on hawkish CNB in Q1’2018

The Czech central bank (CNB) maintained status quo in its monetary policy, key rate was unchanged at 0.50% yesterday as widely anticipated. In an initial reaction, the koruna eased slightly as some market participants had seen a chance for a rate hike, as had we. However, the period of weakness did not last long, as the majority had assumed that the CNB would only change interest rates at its next meeting in February.

Both the statement and the comments by CNB Governor Jiri Rusnok confirmed this assumption. From the central bank’s point of view, the risks for the inflation outlook continue to be pointed to the upside due to the strong economic performance.

Two of the seven board members therefore even voted in favor of a further rate hike already yesterday, but they were outnumbered as the majority on the CNB board wants to wait for the new forecasts due for publication in February. As the strong economic boom will continue short-term and inflation is likely to remain at high levels, we also assume that the CNB will further hike interest rates in February and that the koruna will appreciate as a result.

At the same time, we would caution against excessive CZK euphoria, as Rusnok pointed out again yesterday that the exchange rate development played an important role in the central bank’s stance. The decision in favor of a rate pause was no doubt also partially due to the koruna’s recent strength.

We continue to hold short 27-Nov-17 EURCZK forwards.

We revise our end-2017 EURCZK forecast up to 25.0583, given the lower than expected volatility of the currency post floor removal.

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