We expect the CNB to stay on hold on Thursday as the uncertain outlook for the global economy outweighs the weaker-than-expected CZK and high core CPI factors. We see scope for two CNB hikes this year, but with an improvement in the global economic outlook now a necessary condition. Neither CZK spot nor CZK IRS rates currently offer attractive opportunities.
FX: As per 2019 FX Outlook, we keep a fairly low conviction on CZK and its scope for gains. Not only is the CNB dialling down on its ultra-hawkish stance of 2018, but even rate hikes are not necessarily translating into large gains for the overbought CZK (as evident in 2018 CZK price action, when aggressive CNB tightening led to only modest CZK outperformance vs PLN and the battered HUF). Moreover, with a credible regional alternative to CZK now arising (in the form of HUF supported by NBH), this also argues for lower CZK upside. Hence, even with the new Feb CNB forecast still pointing to a stronger CZK and more hikes, this is in our view unlikely to translate into meaningful CZK upside
Rates: We currently see limited opportunities in the CZK IRS space. With markets pencilling a 25bp hike over the next 9 months with 65-85% probability, and the CNB delaying rate hike prospects, the scope for meaningful gains to front-end CZK payers is limited. Equally, CZK receivers remain off the table given the still hike-prone, yet cautious, CNB and the question marks about the negative effect of cuts on the koruna exchange rate. With scope for moves in front end CZK rates limited, any curve flattening or steepening will be mainly determined by global environment and its effect on the belly and long end rates.
Jakub Seidler |
Chief Economist Czech Republic |
Prague +420 257 474 432 |
Petr Krpata, CFA |
Chief EMEA FX and IR Strategist |
London +44 20 7767 6561 |
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