In terms of EUR/CZK, we have low volatility as we trade sideways in a channel but we expect this to change with an upside breakout in favor of the euro – our logic for going long EUR/CZK is below.
The 22 June will be the last meeting of the board in its current hawkish makeup and an interest rate hike of 125bp is expected but this is unlikely to help the CZK much…
“We stay bearish on the Czech koruna given our view that investor nervousness around the monetary policy outlook is going to intensify once a new governor – Ales Michl – steps in early July.”We think that EUR/CZK downside even in the event of a sizable policy rate hike next week (e.g. 100bps-125bps).” (CREDIT SWISSE)
The new bank governor Ales Michl has proposed interest rate stability and is against aggressive rate hikes and he becomes governor on 4 August.
We expect a dovish stance from the CNB and the market is still seeing the CNB as too hawkish going forward. The first-rate cut could come earlier than the middle of next year, which the market is currently pricing.
A big influence on the pair will be the problems in the eurozone where the zone looks odds on to go into recession in our view in the next few months.
90% of output is exported with the majority going to the zone. The CZK will be hit hard by the slow up in the eurozone and also inflation has hit the consumer hard:
“Housing and energy, transport, and food prices contributed most to the year-on-year growth in consumer prices. These are the items that make up the majority of the budget of low-income households. However, prices are rising strongly in almost all sections of the consumer basket and this growth continues to accelerate.” (CSÚ chairman Marek Rojíček)
So we will see a slow up in the domestic economy as well. Interest rate hikes are not the answer as most inflation in the zone is on the supply side shock and not on the demand side.
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We expect a move to risk-off which will also pressure the CZK lower on the euro if it comes but even if it doesn’t we see a higher EUR.
On the chart below we can see one of our favorite trade setups which is a sideways channel unfolding in low volatility. The drop in volatility points to a big move and we expect it to be to the upside. Key levels of support and resistance below to look out for.