FxWirePro: Czech inflation in line with projections - Uphold shorts in EUR/CZK on central bank’s revised forecasts

In the new inflation report, the Czech central bank CNB sharply revised up its 2017 inflation forecast from 1.9% to 2.4%. This clearly portrays that inflation would persist above the 2% target for several quarters going forward before it returns to target in 2018. In fact, there is the likelihood that inflation may even exceed the target upper limit of 3% at some point around the middle of 2017.

We, too, have recently revised up our 2017 inflation forecast from 1.1% to 2% given the oil price driven inflation acceleration we are witnessing in many emerging markets. CNB's new inflation forecast is consistent with CNB ending the koruna cap as scheduled around mid-2017. We forecast EUR-CZK to fall towards 25.00 by the end of 2017.

Stay short EURCZK on limits of the unconventional policy, short in EURCZK was upheld as the CNB policy floor enters its dying days (or dying months). Inflation returned to the 2% target earlier than expected which supports the case the floor to be removed as part of a fundamentally warranted tightening in monetary conditions by the middle of the year.

That being said, we are cognizant that this is a well-positioned-for event and forward points are becoming increasingly volatile as the market tries to second-guess the potential extent of profit taking on short EURCZK positions once the floor is removed, and the FX market's ability to absorb a potentially heavy quantity of EURCZK demand without causing the cross to perversely rally.

At spot reference: 27.0230, stay short in 3m EURCZK forward, indicative offer at 0.57%.