The CNB inflation report and minutes should push CZK weaker.
The HUF is set to outperform on monetary policy, growth and external balances.
Carry should support the HUF versus the CZK.
Strategy
Based on the CNB’s recent communication, we believe the CNB Board would prefer an exchange closer to 27.80-28.00 than the 27.00 floor. Since the latest board meeting (6 November), the EUR/CZK has moved lower, implying that inflation expectations have fallen even further. Consequently, we believe it is likely the CNB will step up verbal intervention to push up inflation expectations. The CNB could try to communicate directly or indirectly that it prefers a higher level for EUR/CZK than the current level to ensure an increase in inflation expectations. Although we do not expect the CNB to lift the current EUR/CZK floor from 27.00, we expect the CNB to signal very soon and more clearly that it welcomes a weaker CZK, closer to 28.00. In particular, we will be watching the new inflation report and minutes from the last CNB board meeting, both published on Friday 14 November.
Fundamentals
Despite the effect of the devaluation having been visible and positive, it has been smaller than assumed by the Czech central bank, due mainly to external factors (weaker foreign demand, increasing deflationary pressures, falling commodity prices). Due to this, inflation has consistently surprised on the downside and has not accelerated to approach the 2% inflation target as fast as assumed originally by the CNB. This has resulted in a downward revision of the CNB’s inflation forecast and postponement of the EUR/CZK floor exit, which was originally set for Q3 15 and has now been pushed into Q1 16. The risk of a weaker CZK remains. On the other hand, Hungary is set to benefit from its fairly strong external position and strong economic recovery. Furthermore, the Hungarian central bank has opted for a fairly neutral stance on monetary policy, which means that Hungary should maintain positive carry compared with very low Czech interest rate levels.
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