EUR/CZK to see upward pressure amid increased koruna volatility – Commerzbank

Czech National Bank's (CNB's) board gears up for a pre-emptive rate hike in June. Economists at Commerzbank expect the EUR/CZK to come under renewed upward pressure.

CNB to take a last stand to hike the base rate by a safe margin

“That the benchmark rate will likely be hiked by at least 75bp in June is now widely discounted by the markets, as it has been unambiguously signalled by a majority of board members; some may even have hinted (within their comments) that the balance at CNB need not decisively change in favour of dovish even after the July overhaul –  prominent hawks will still be in place.”

“President Milos Zeman is planning to overhaul the board, in close consultation with incoming governor, Ales Michl. In fact, announcements along these lines from Zeman are now expected right after the 22 June CNB meeting. Given the controversy, we would not be surprised to see the constitutional mechanism for CNB appointments becoming a political hot topic for the next election.” 

“For now, we recommend preparing for upward pressure on EUR/CZK and increased CZK volatility. It does not matter whether or not CNB will hike the rate by more than 75bp in June, the exchange rate will come under increasing pressure in the medium-term as soon as the central bank's reaction function becomes one-sided (i.e. lacks the ability to freely hike rates).”