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In CEE FX space, last Friday conveyed two key pieces of data:
1) We received the flash estimate of Q4 GDP, which disappointed slightly at 0.5% QoQ against the consensus expectation of 0.7%. Full-year 2017 GDP growth worked out to 4.4%. Despite the slight disappointment in Q4, the GDP data are consistent with a strong economic upswing.
2) What was more interesting, export-import price data portrayed intensifying deflationary pressure from foreign prices - import prices were down 4.2% YoY in December. This continues a trend we have observed for longer than a quarter now, which makes it likely that inflation will undershoot CNB projections during H2’2018 and 2019.
This, in turn, means that CNB may not hike rates after the middle of 2018. The reading is mildly CZK-negative, although we are generally bullish about the currency in the medium-term.
The CZK is the best-performing CEE currency this year followed by the PLN. The HUF is lagging. Central banks are key drivers: The CNB almost seems eager to strengthen the CZK.
After strong gains in CZK, we scale down the OW in CZK as the central bank sounded dovish at its last meeting indicating to us a degree of discomfort with the pace of appreciation. However, we only expect a loss of momentum in the trade and not a reversal and hence we remain short EURCZK in cash.
Alternatively, stay short in forwards contracts of far-month tenors as we revise our end-2017 EURCZK forecast up to 25.0180, given the lower than expected volatility of the currency post floor removal.
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