KBC Market Research Desk
KBC Bank
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Limited impact of the Brexit vote on business sentiment in EMU reduces like hood the CNB will extend its FX policy
Following the Brexit vote the EUR/CZK pair has hovered just above the intervention floor set by the Czech National Bank (EUR/CZK 27.00). So in fact the Czech currency has been trading at the strongest levels allowed by the central bank FX policy. There are two reasons explaining the strength of the CZK: first, Czech fundamentals remain strong and secondly, financial and economic contagion from the Brexit vote has been negligible so far.
Recall that according to the preliminary estimate, the euro zone composite PMI weakened only marginally in July, from 53.1 to 52.9. The outcome was well above the market consensus of 52.5. The same picture has delivered the German Ifo this morning as it has confirmed that the business sentiment deteriorated less than market expected in June. So overall, it seems the German/euro area economy continues to grow at a moderate pace at the start of the third quarter, suggesting that the UK decision to leave the EU is having limited impact on activity for now.
Hence, the recent business sentiment reports prove some resilience of the Eurozone. Based on the resilience, the ECB does not need to start thinking about imminent expansion of monetary easing, which in the Czech case implies that the likelihood that the CNB decides to extend its FX interventions commitment (to defend the EUR/CZK floor) has been reduced. We assume the probability that the CNB commitment will be extended beyond the mid of 2017 to be around 30% at the moment.
| Currencies | % chng | |
| EUR/CZK | 27.02 | 0.0 |
| EUR/HUF | 313.2 | -0.2 |
| EUR/PLN | 4.36 | 0.1 |
| EUR/USD | 1.10 | -0.5 |
| EUR/CHF | 1.08 | -0.3 |
| FRA 3x6 | % | bps chng |
| CZK | 0.30 | 1 |
| HUF | 0.79 | -2 |
| PLN | 1.70 | 1 |
| EUR | -0.31 | 1 |
| GB | % | bps chng |
| Czech Rep. 10Y | 0.40 | 0 |
| Hungary 10Y | 3.03 | 2 |
| Poland 10Y | 2.92 | -2 |
| Slovakia 10Y | 0.53 | -1 |
| CDS 5Y | % | bps chng |
| Czech Rep. | 41 | 0 |
| Hungary | 153 | 0 |
| Poland | 97 | 0 |
| Slovakia | 42 | 0 |
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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