A softer Central and Eastern European rates outlook has weakened support for the koruna, as markets have pared back the number of expected policy hikes in Poland and the Czech Republic to around two to three over a one-year horizon, from roughly four previously. In contrast, Hungary has seen a deeper repricing towards easing after a dovish National Bank of Hungary meeting, with nearly 115bp of cuts now implied over the same period. Against this backdrop, EUR/CZK retains an upward bias after touching 24.25.
Attention turns to Polish inflation data due on Friday, with May forecast at 3.7% year-on-year, the highest since June last year and above the National Bank of Poland’s tolerance band. The real policy rate in Poland is expected to reach neutral levels in May and likely turn negative in June, which could limit scope for further rate cuts even if oil prices fall. The Czech National Bank is seen holding rates for longer as nearer-term inflation prints ease, while an ECB rate hike in June would narrow rate differentials and add pressure on the koruna.
Shifting Rate Expectations and Currency Impacts
Given the shifting interest rate landscape, we see the Czech Koruna’s recent strength as temporary. The market is no longer pricing in aggressive rate hikes from the Czech National Bank, reducing the currency’s appeal. This leads us to favor derivative positions that will profit from a weaker Koruna against the Euro in the coming weeks.
We note the widening policy gap between the European Central Bank and its Czech counterpart. With Eurozone inflation expectations holding firm around 2.4% and markets pricing in a near 90% chance of an ECB rate hike in June, the case for a stronger Euro is solid. This contrasts sharply with the Czech Republic, where April’s inflation slowed to 2.9%, giving the central bank room to stay on hold for an extended period.
Polish Zloty Outperformance and Risk Management
A clear divergence is also emerging with Poland, where we expect the May inflation figure to print at 3.7%. This will push Polish real interest rates into negative territory, putting pressure on the National Bank of Poland to consider a more hawkish stance than previously expected. Consequently, we are positioning for the Polish Zloty to outperform the Koruna, making a long PLN/CZK options trade an interesting relative value play.
We must, however, be cautious about the risk of central bank intervention, as seen during periods of high volatility in 2022. The Czech National Bank has historically stepped in to prevent excessive Koruna depreciation. For this reason, we believe using call spreads on EUR/CZK is a prudent approach, as it offers a defined-risk way to position for a move higher towards the 24.50-24.75 range.
