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The main criteria for exiting the FX floor remain inflation, and on that front, all seems on track given the recent acceleration in both headline and core. With the inflation criteria met, the permanent and steep accumulation of FX reserves in our view reinforces the case for the CNB to exit the FX floor sooner rather than later.
Nonetheless, the lack of any verbal intervention in several months also suggests the board is more relaxed about reserve buildup than what we would have guessed at these levels.
We attach a 50% probability to May 4’s regular meeting as FX floor exit date, 40% to anywhere between April 1 and May 3, and 9% to March 30 (we save a symbolic 1% for a postponement in case of a large external shock).
The extent of long positioning in CZK complicate the dynamics in EURCZK immediately following a de-peg, albeit we remain comfortable in a medium-term target of 26.0.
FX intervention in March was EUR 8.2bn compared to EUR 14.5bn in January and takes cumulative intervention since the floor was introduced to EUR 62bn, or 35% of GDP. This speaks very clearly to the likely scale of long investor positioning in the currency.
Stay short EURCZK forward – sold 26.6883 expiry 27 November 2017.
