12 Jan 2015
EUR/CZK might see a short-term peak at 28.7-29 levels – KBC
FXStreet (Barcelona) - The KBC Bank Research Team anticipates EUR/CZK might see a short-term peak in the 28.7-29 territory, and further expects CNB to keep policy unchanged in its February meeting.
Key Quotes
“CNBs November inflation forecast that had envisaged annual price growth returning to its target level (2 % y/y) by the end of 2016 is effectively dead. Inflation will stay close to zero at the beginning of this year and only slowly climb up later while still staying below 1 % by the end of 2015.”
“Inflation has been muted largely owing to falling oil prices. So far, the CNB board has interpreted declining oil prices as a positive supply shock helping rather than hurting the economy. This way of interpretation did not provide arguments for further devaluations.”
“However, according to the latest minutes from the CNB board meeting, central bankers may change their positive view of the cheap oil if deflation in the euro zone would have strong negative spill-over effects on domestic demand or longer-term inflation expectations (which has not been the case so far).”
“We expect that the Czech central bank will not come up with any revolutionary changes at its eagerly expected February meeting.”
“Nonetheless, the crown will likely be weakening before the meeting. How far can the pair EUR / CZK weaken in the upcoming weeks? Markets remember that the November 2013 intervention pushed the EUR/CZK pair higher by about 5-6 %. It would not be surprising then, if we see the short-term peak in the EUR/CZK 28.7-29 territory (i.e. a roughly 5% devaluation against the 2014 average). After the February (5th) meeting, the crown should start trimming the loss.”
Key Quotes
“CNBs November inflation forecast that had envisaged annual price growth returning to its target level (2 % y/y) by the end of 2016 is effectively dead. Inflation will stay close to zero at the beginning of this year and only slowly climb up later while still staying below 1 % by the end of 2015.”
“Inflation has been muted largely owing to falling oil prices. So far, the CNB board has interpreted declining oil prices as a positive supply shock helping rather than hurting the economy. This way of interpretation did not provide arguments for further devaluations.”
“However, according to the latest minutes from the CNB board meeting, central bankers may change their positive view of the cheap oil if deflation in the euro zone would have strong negative spill-over effects on domestic demand or longer-term inflation expectations (which has not been the case so far).”
“We expect that the Czech central bank will not come up with any revolutionary changes at its eagerly expected February meeting.”
“Nonetheless, the crown will likely be weakening before the meeting. How far can the pair EUR / CZK weaken in the upcoming weeks? Markets remember that the November 2013 intervention pushed the EUR/CZK pair higher by about 5-6 %. It would not be surprising then, if we see the short-term peak in the EUR/CZK 28.7-29 territory (i.e. a roughly 5% devaluation against the 2014 average). After the February (5th) meeting, the crown should start trimming the loss.”