CNB FX intervention may become a problem sooner than we expected

Unlike the Polish zloty or the Hungarian forint, which went through a massive sell-off last week, the Czech koruna held near its levels and has even been stronger since Friday. Thus, given the pressures coming from EUR/USD, one would think that the cost of the CNB's FX interventions must have risen significantly over the past few days. As we already have the first data for last week, it is thus time to look at the overall account again. Of course, the banking sector liquidity data contains a lot of noise, but the first indication suggests that the CNB spent almost EUR9bn last week, which is as much as the whole of May and June combined. In total, we thus estimate the cost at EUR17.8bn since mid-May, which is 11% of the FX reserves CNB had at the end of April. Despite the inaccuracies in the data, it is clear that interventions are getting more and more expensive by the day. While this is as we expected, the pace of the acceleration in costs is surprising and could become a problem for the central bank very soon if the sell-off in the CEE region continues. We had previously expected this moment to occur in the fourth quarter, however, based on these numbers, it appears that it may occur as early as August/September, depending on further developments in global markets.

June inflation will be published tomorrow, the last number before the CNB's August meeting. We expect a further rise from 16.0% to 17.3% year-on-year, however, as we mentioned earlier, we may see a more significant jump up due to the announced energy price hikes. However, the main focus here will be July and August, for which we expect the biggest move in energy prices, which could push inflation up to 20% YoY.

The key level for the Czech National Bank at the moment is 24.60-70 EUR/CZK

We expect the CNB to see similar numbers, which may lead the central bank to be more aggressive in pushing the koruna lower, which was our base case scenario. The CNB is encouraged to do so this week by low liquidity and liquidation of short positions built up over the past two weeks. Therefore, in our view, the key level for the CNB at the moment is the 24.60-70 EUR/CZK level and the rest of the move is more market driven. This is evidenced by the renewed relationship between the interest rate differential and the koruna in recent days due to growing expectations for a CNB rate hike at the August meeting. Moreover, these expectations may gain additional momentum after an inflationary print and the koruna could go even lower. At the moment we see room for EUR/CZK to get to 24.30. However, we continue to believe that the CNB will not raise rates in August and the koruna will come under pressure again.