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CNB's latest board minutes, from June, portray an increasingly confident central bank, convinced that all domestic macroeconomic parameters are now consistent with (gradual) normalization of monetary policy. The main reasons the bank's board is still cautious are:
i) Externally induced' disinflation, and
ii) The tightening effect of an appreciating koruna. Nevertheless, when the domestic inflation pressure steadily exceeds imported disinflation pressure, rate hikes will follow. We envisage only a low probability that the CB will hike its base rate by 0.20bp to 0.25% in early August.
And in the case of a rate hike, we would not see CNB continuing its hiking cycle at a regular interval as we, anticipate the subsequent course of inflation around CEE to be soft. Rather, we would see a rate hike as a one-off adjustment of the policy rate away from 'technical zero'.
We could foresee EURCZK gradually declining further over the coming year.
In EM, keep structural long in ILS vs a 50:50 EUR:USD basket.
Our EMEA EM strategists remain constructive on both CZK and ILS. We remain bullish CZK, with the CNB likely to begin monetary policy normalization in the coming months and supportive medium term valuations. We think the shekel should remain on a medium-term appreciation trend, given a supportive current account surplus, a rising positive NIIP position and the potential inclusion of Israel to a widely followed global government bond index which may drive further capital inflows.
Add longs in ILS vs a 50:50 EUR:USD basket with a target of 3.50, and review point of 3.85. Marked at +1.64%.
Stay short in EURCZK via forward contracts of far month tenors – for targets upto 25.77 expiry 27 November 2017. Marked at 2.25%.
