EUR/CZK to drop substantially to 24.80 by end-2022 – CE
|The Czech tightening cycle over the next few years is likely to be more aggressive than investors currently expect. This should support a rise in bond yields and, together with a strong recovery in the global economy and improved risk appetite, boost the koruna, per Capital Economics.
Key quotes
“Based on FRA pricing, investors expect 50bp of rate hikes in Czechia this year, 50bp in 2022 and 10bp in 2023, taking the policy rate from 0.25% to 1.25-1.50% by end-2023. But we think tightening will be more aggressive than this and investors looking to gain exposure to the inflation trade within a safe emerging market may find opportunities in Czechia.”
“A vaccine-induced recovery in the global and Czech economies accompanied by strong Czech inflation will probably support an aggressive tightening cycle. We have pencilled in a 25bp rate hike in November 2021, with the policy rate rising to 1.25% by end-2022 and 2.25% by the end of 2023. We think this will support a rise in the 10-year bond yield to 2.25% by end-2022.”
“We think the koruna will appreciate a bit further this year against the euro (our end-2021 forecast is for 25.30) and to rise more strongly from 2022. We expect one-year ahead rate differentials with the eurozone to widen from 140bp to 250bp by end-2022. The next few years will be an environment in which a global recovery, improved risk appetite and rising Czech interest rates support the koruna. We expect the EUR/CZK to fall to 24.80 by end-2022 and 24.30 by end-2023.”
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