The Czech National Bank (CNB) will hold a monetary policy meeting where economists at ING predict that EUR/CZK will move below 23.50. The CNB is expected to follow other European central banks and take a hawkish tone. They are also expected to confirm their readiness to intervene in the FX market should the CZK move higher. ING estimates that CNB intervention levels are at around 24.60-24.70 EUR/CZK, but the market is not ready for them at the moment. The Koruna boasts decent carry within the CEE region, and ING believes it has the best risk/reward within the region at the moment.
The Czech economy has been performing well recently. According to Trading Economics, the Czech Republic’s GDP grew by 2.9% in the third quarter of 2019, and inflation rose by 3.2% in November 2019. These figures put the Czech economy on par with the Eurozone average. The Czech Republic’s favourable economic environment is supported by the country’s geographic location, low unemployment rate, and high competitiveness.
The Czech Republic also has a strong banking system, which is well-regulated by the CNB. The CNB has been successful in maintaining financial stability, and its policies have been effective in keeping inflation under control despite the recent global economic slowdown.
The CNB’s current key interest rate is 2%, which is higher than most other European central banks. The CNB has been gradually raising interest rates since 2017, despite external pressure to keep them low. The CNB is committed to maintaining price stability and is prepared to take further steps to achieve it.
Turning to the FX market, the Koruna has been performing well against the Euro. The CZK has the highest beta against the global story, and higher EUR/USD and low energy prices are playing into its hands. The Czech Republic’s proximity to Germany, the Eurozone’s largest economy, also contributes to its favourable FX position. The Koruna maintains decent carry within the CEE region, making it an attractive option for investors looking for yield.
The CNB’s readiness to intervene in the FX market if the CZK moves higher is seen as a positive sign by investors. This policy helps limit potential losses and maintains financial stability. ING estimates that intervention levels are around 24.60-24.70 EUR/CZK, but the market is not ready for them at the moment.
The market is expected to see a move below 23.50 EUR/CZK during the CNB’s monetary policy meeting. ING believes the Koruna has the best risk/reward within the CEE region at the moment. The market is expected to react positively to the CNB’s hawkish tone, which may favour a repricing of rate cut expectations and a higher CZK.
Overall, the Czech Republic’s strong economic performance, stable banking system, and favourable FX position make it an attractive option for investors. The CNB’s commitment to maintaining financial stability and price stability further enhances its appeal. The Koruna’s carry within the CEE region adds to its attractiveness, making it a good option for investors looking for yield.
