CZK: Unfortunate timing for currency
As with the Polish zloty, yesterday's surprise in US inflation data means another threat to the Czech koruna (CZK) as well. This comes after a sharp depreciation of more than 1% following the central bank's decision last week. EUR/CZK thus touched 25.40 yesterday, pushing record highs again. For now, the central bank seems more interested in medium-term than daily volatility, so we do not draw big conclusions here. However, we think tomorrow's inflation numbers will provide more reasons to price in more rate cuts, which could hit the CZK again.
On the other hand, from a rates market perspective, we are approaching the point where all room for rate cuts will be fulfilled and the CZK will be driven more by core rates and differentials against the ECB. In the short term, we could see further weakness touching 25.50 EUR/CZK (despite our previously more optimistic CZK view) and EUR/CZK moving down later. The Czech National Bank still has plenty of time before the March meeting in six weeks, but even so, we will have to watch the CZK closely.