The Czech currency eased yesterday as ECB Trichet hawkish comments hurt CE currencies, while CNB governor Tuma did not impressed the market. CNB as expected left interest rates unchanged, while the governor used a term ‘in the longer term’, when he described a period when CNB should raise the official rate. Therefore we think that a sit-and-wait policy is the most probable scenario for the coming months and CNB’s stance will hardly support the Czech currency. In our view the next hike can be expected in January.
However, we cannot even rule out that the CNB will raise rates earlier, after discussing October’s forecast. Much will depend on the koruna’s exchange rate. An exchange rate of EUR/CZK 28.30 or weaker, combined with the ECB raising rates to 3.25% in October, would increase the likelihood of a hike in official rates in the Czech Republic. The GDP (and domestic demand) growth which will be published next Friday along with the August inflation will be also important for the CNB future decisions. In case of very strong domestic consumption and worsening of inflation outlook the rate hike probability will increase.
Today, the koruna will focus on core market as we expect some key releases in the US. The US payrolls and ISM data will define sentiment in emerging markets for today and event for the beginning of the next week. Weaker payrolls and that is why lower bond yields in core bond markets could be eventually for CE currencies supportive. Technically, the EUR/CZK sees the key resistance at 28.29, while the support could be found at 28.16 and 28.10 respectively.
(CSOB - Investment research)