NewsEbury: The CZ koruna & The Europe FX Forecast Revision Sept. 2021

The Czech Republic koruna has risen by approximately 3% year-to-date against the euro. We think that the koruna rally was driven primarily by the rapid interest rate increases from the Czech National Bank, where they began hiking rates in June. The MPC raised rates by another 25 basis point in August, taking the reference 2-week repo rate to 0.75%. The market expects rates to be raised further before the end of the year to approximately 1.5%, and reach levels similar to those before the pandemic began in 2022. The aggressive interest rate increases have been a result of the build-up inflationary pressures that has seen the headline inflation rate increase back near or above the upper end of the CNB’s inflation target (2%±1 p.p.) since April. In July, consumer prices increased by 3.4%, and core inflation has also risen to 3.8%, its highest level in over 14 years.


Manufacturing PMIs increased to a record high of 62.7 in June, before moderating to 61.0 in August. The economy expanded only by 1% on a quarterly basis following a 0.3% contraction in the first quarter. This means that the country is still far from reaching pre-pandemic levels of GDP compared to its regional peers. Furthermore, we continue to expect an appreciation of the Czech koruna in the coming quarters. Considering Czechia’s strong macroeconomic fundamentals, and a positive current account, the country is currently engaging in quite an aggressive interest rate hike cycle. This, in our view, should balance out the negative effect of a somewhat less favourable external situation, namely the stronger-than-expected US dollar.


The Eastern European currencies have had mixed performances since the beginning of the year.

The Hungarian forint and Czech koruna have appreciated, the Polish zloty is trading roughly unchanged year-to-date, and the Romanian leu has weakened. Hungary and Czechia began raising interest rates in June and have continued on a tightening path since then. The Polish zloty has lagged behind, in large part due to the ultra-loose monetary policy stance of the central bank that has not decided to hike interest rates nor officially taper its quantitative easing programme. That being said, the MPC members’ rhetoric seems to be shifting as of late as inflation rates have increased sharply during the summer. The key differentiating factors that determine our outlook for the European currencies include the monetary policy stances of the region’s respective central banks and economic fundamentals. We expect a continuation of interest rate hiking cycles in Hungary and Czechia and believe that Poland will likely join them soon with gradual interest rate increases. The three countries have either balanced or positive current accounts, which we think should work in favour of an appreciation of their currencies. With Romania continuing to struggle with its high current account deficit, we think that the currency is likely to continue being pressured lower and gradually weaken.

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