EUR/CZK tests floor (Monthly Outlook, 1-3 month)

CNB is likely to remain dovish and committed to its EUR/CZK floor of 27.00. In the past month, the Czech koruna has continued to test the floor.

In conjunction with lower oil prices, a stronger koruna adds deflationary pressure and poses a downside risk to CNB's inflation target of 2%. As it is expected in the previous CRC, after four months of a pick-up in headline inflation, the July figure has taken a dip to 0.5% y/y (prior 0.8% y/y). This was slightly below consensus and well below CNB's lower-bound of the inflation target range. Headline inflation is expected to reach CNB's lower-bound of the target range of 1% y/y in Dec'15 /Jan'16, says RBC Capital Markets.

In addition to a stronger koruna posing a downside risk to headline inflation, it may also hurt exports growth. Net exports had contributed +0.8pp to GDP in Q2, whereas the contribution in Q1 was +1.1pp. Any slowdown in Euro area's growth, especially Germany may also dampen net exports and thereby impact GDP growth. Real GDP y/y (Q2) came in at 4.4% y/y, which was well above consensus.

A significant portion of the upside surprise should be attributed to an increase in inventories and it was also helped by lower oil prices, addeds RBC Capital Markets. Meanwhile, household expenditures and net exports' contributions were below CNB's expectations.