Negligible effect of Brexit on business sentiment in EMU lowers odds of CNB to extend FX policy

The EUR/CZK pair, following the UK’s vote to leave the EU, has remained just above the intervention floor set by the Czech central bank (EUR/CZK 27.00). The Czech koruna has been at the most solid levels permitted by the Czech National Bank’s FX policy. There are two reasons why the CZK is strong: firstly, the fundamentals in Czech Republic continue to be solid, and secondly, the economic and financial contagion from the Brexit vote has been insignificant so far, noted KBC Market Research in a research report.

The preliminary estimate noted that the euro area composite PMI eased just a tad to 52.9 in July from 53.1 in June. This was quite more than the market projections of 52.5. Similarly, the latest German Ifo index that released today morning has affirmed that the business confidence dropped below market forecasts in June.

Therefore, in all, it appears that the German/euro area economy continues to keep expanding at a moderate pace at the beginning of the third quarter, implying that the UK’s vote to exit the EU is not affecting the activity significantly for now, stated KBC Market Research.

Thus, the latest business confidence reports provide evidence of certain resilience in the euro area. Given the resilience, the European Central Bank is unlikely to begin mulling regarding imminent expansion of monetary easing. This suggests that the possibility of the Czech National Bank to decide to extend its FX interventions commitment to defend the EUR/CZK floor has been reduced.

“We assume the probability that the CNB commitment will be extended beyond the mid of 2017 to be around 30 percent at the moment,” added KBC Market Research.