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The CNB failed to upgrade much its rate projection disappointing against market expectations. The CNB hiked the policy rate by 25bps to 0.50% as widely expected.
However, the central bank upgraded its rate projection only modestly, which was in contrast to the hawkish rhetoric from recent CNB’s Board member speeches.
The rate projection also didn't match the more hawkish comments by the Governor in the post-meeting Q&A, when he highlighted that the economy is operating above potential, with completely eroded slack in the labor market and close to double-digit wage growth.
Overall, we chose to attach more weight to the verbal guidance of the central bank. Our economist forecasts 100bps of hikes next year, vs. market pricing for less than 50bps over the period.
We stay short EURCZK, although now we are not far from our target. We entered the trade in early September when EURCZK was trading above 26.0 with a 25.40 target. We believe the trade remains very well grounded in the macroeconomic backdrop of the economy, and hence we chose to stay positioned long and we would fade the recent retracement higher in EURCZK.
Hence, our recommendation goes this way, stay short in EURCZK via forwards exchange contracts of far month tenors (3-month expiries), which is currently trading at 25.6214. We target a 4% move lower to 24.5965 and place a stop loss at 26.0057. Our trade horizon is 6-12 months. The position is carry-neutral.
Risk profiling: Global financial stress, elevated CZK liquidity, the sharp increases in CZK liquidity may pose a risk. Additionally, episodes of major global financial stress would likely undermine CZK valuations. In the event of intense flight-to-quality flows, market players may square their CZK exposure due to re-pricing of CNB policy path and to risks stemming from elevated long CZK positioning.
Under this scenario, EURCZK can rise sharply toward the 26-27 levels or even higher.
Thus, this trade is more sensitive to external shocks. It is likely that CZK rates would be more resilient / less response to external shocks. Source: JPM, SG & in-house
