EUR/CZK likely to dip towards 25.00 this H2, says Commerzbank

The EUR/CZK currency pair is expected to dip towards a level of 25.00 in the coming months, especially in the second half of this year. Further, Czech headline inflation is likely to overshoot the central bank’s 2 percent target in the coming quarters.

Although many policymakers will view such an overshoot as a cyclical phenomenon, there would be no argument for CNB to delay ending its koruna cap at the scheduled time. The cap is likely to be dismantled around the middle of 2017.

"We see EUR-CZK dropping noticeably in the following quarters. Our outlook is no longer materially different from that of the central bank. Earlier, our forecast had been for much lower inflation – just around 1 percent this year, which would be consistent with CNB extending the koruna cap further, at least until the end of 2017," Commerzbank commented in its latest research report.

During volatile cyclical swings, the magnitude of fluctuations is difficult to fully anticipate –hence, upward surprises tend to follow downward surprises. As an illustration, CNB had earlier forecast inflation to gradually reach its 2% target during the latter part of H1 2017.

But, this 2 percent level was already reached by December 2016. The prospect of target overshoot is unnerving for an orthodox, strictly inflation targeting central bank such as CNB. This is why in its latest Inflation Report, the CNB attempted to pre-empt as much upside surprise as possible by raising its 2017 inflation forecast from 1.9 percent straight to 2.4 percent; the forecast now clearly portrays above-target inflation.

This prepares the ground for arguing that inflation target has been sustainably reached. Based on such an argument, CNB is very likely to end its koruna cap around mid-2017, which is its present guidance.

"We forecast EUR-CZK falling gradually towards 25.00 in the quarters following the removal of the cap," the report added.