Currency Forecast - CZK: Cap Removal To Spark Long-Term Appreciation - MAY 2017

BMI View: The Czech National Bank (CNB) will abandon its currency cap of CZK27.00/EUR in early H2 17 on account of inflation rising back to its target range. This will result in a sharp CZK appreciation against the euro, testing long-term resistance at around CZK25.20/EUR in 2017. On the back of strong macroeconomic fundamentals, the koruna is set to strengthen further in 2018.

Short Term Outlook (three-to-six-months)

In the next few months we expect the Czech National Bank (CNB) to abandon its currency cap to the euro of CZK27.00/EUR, resulting in a steep appreciation of the koruna (CZK). The main trigger for the cap removal is the accelerating inflation rate, which rose sharply to 2.2% y-o-y in January, the highest reading since 2013. While the CNB's currency cap has been in place since November 2013 to counter deflationary pressures, its goal has largely been achieved, with inflation rising to the CNB's target range of 2.0-4.0%.

Appreciation To Resistance After Cap Removal
Czech Republic - CZK/EUR Exchange Rate
Source: Bloomberg, BMI

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