FxWirePro: Recovery in Czech Q4 fundamentals, Can CNB exit FX floor? Stay short in EUR/CZK

We estimate a modest 2.0% QoQ SAAR rebound in GDP growth (from 0.9% in Q3’16). Output in the industrial sector accelerated by 9.9% QoQ SAAR — after a holiday distorted -7% QoQ SAAR contraction — likely adding the largest contribution to growths Q4 bounce.

Retail trade also picked up by 3.9% QoQ SAAR (from 2.5%), which, although the series is extremely volatile, reflecting solid consumer demand.

Construction data suggests EU fund absorption has picked up, and after a year of sequential contraction (Q3’15 - Q2’16) has hopped by 4.3% QoQ SAAR (1.6% in Q3’17). From the expenditure side, we suggest then stronger household consumption, stronger fixed investment offset by somewhat lower net trade contribution (suggested by monthly trade data).

Inflation surprised to the upside again in January, but this time it’s a broad-based price increase.

The sharp acceleration in core CPI should reassure the CNB about a near-term exit from the FX floor and skepticism voiced by a minority of the board about a near-term exit is likely to fade.

We expect the CNB will discontinue the FX floor at the May 4th regular policy meeting.

Stay short EURCZK on limits of the unconventional policy, we remain short EURCZK as the CNB policy floor enters its dying days.

We advocated shorts in EURCZK via the forward contracts just a week ago – at spot reference: 27.0180 expiry 27 November 2017, we now uphold the view.