Czech koruna under pressure due to lower inflation

Yesterday the Czech koruna came under pressure after the inflation release, which was significantly below both our estimate and the market consensus. Low inflation supports the scenario of prolonged stability of domestic interest rates and weakens the koruna in our midterm outlook during the first and second quarter of 2007. The reaction of the market in the morning was immediate and the Czech currency got under pressure despite rather positive regional sentiment. The pair was pushed back above EUR/CZK 28.25 and stayed below 28.30 till the end of the session. Nevertheless today we believe the sentiment on the Czech FX market might change. Yesterday’s Bernanke’s assessment of the US economy could bring positive sentiment to the emerging markets. That is why we don’t expect to clear the EUR/CZK 28.30 resistance and we rather bet on slight positive correction of the Czech koruna today.

ČSOB - Investment research