Czech koruna decouples from its PEERs and continues to firm

The Czech koruna has decoupled from its regional PEERs and extended its gains since Tuesday. Interestingly, the koruna is firming despite ongoing dovish rhetoric coming from the CNB, which keeps rate-hike expectations very low. Currently no rate hike is priced in untill the end of this year in FRA contracts.
In our view, these expectations are, however, very low, because headline and core inflation will pick in the second half of the year, so the real interest rate might decline even lower and more and more CNB Bank Board members will not be satisfied with this situation. Thus, the CNB should already hike in 2011 and this respect the front end of the Czech bond and swap curve stands currently too low.


EUR/CZK: Czech koruna continues to firm in contrast to other regional currencies



Poland - NBP Governor sounds cautious
The Polish zloty underperformed the rest of its regional peers on Wednesday as markets have been focused mainly on US debt crisis so far this week.
Heightened uncertainty which is being translated into higher volatility of the EUR/PLN cross rate seems to worry not only investors but also central bankers. NBP President Marek Belka reminded markets that he did not rule out interventions in forex markets to limit volatility of the zloty. At the same time, he added that the NBP did not plan to target a specific level of the exchange rate.
Regarding yesterday’s news, Belka said that the NBP was increasing interest rates cautiously in order not to hurt economic growth. He reminded that inflation soared primarily due to external factors like high commodity prices.