The past month has seen the Czech koruna become one of the worst performers among eastern European and EM currencies, amid a worsening domestic pandemic. The nation had previously been successful in containing the virus situation through the summer, which was reflected in the koruna’s performance compared to other Eastern European currencies over this month.
From August to September, CZK had weakened over 4.5% against the euro, while the Polish zloty fell by almost 5% against the euro and the Hungarian forint even saw a 6.5% decrease vs the euro. However, since yesterday the Czech Republic has become the EU’s worst hotspot with the most cases per capita over the last two weeks. Economic data coming out of the country has been slightly improving over summer, but with the prospect of a worsening virus situation before hopes of any economic recovery, the Czech koruna remains under pressure.
CZK sees more substantial weakening vs EUR compared to PLN and HUF
Despite the growing downside risks to the Czech economy, the Czech National Bank (CNB) retained a wait-and-see approach in its September meeting and kept its monetary policy unanimously on hold.
Governor Rusnok did not mention any need for further easing at the press conference, and the central bank’s inflation outlook remained the same. The CNB expects CPI inflation to remain above 3% this year and to slow down towards its 2% target before the end of 2021. Rusnok did state that the CNB does not want the currency to collapse, and discussed that the central bank would take action in the case of a CZK crash. Without any substantial CZK weakening though, the central bank expects its interest rates to remain at the current level at least until mid-2021.
Economic data from the Czech Republic points to a gradual pickup in activity since the start of the outbreak. Manufacturing purchasing managers’ indices have steadily increased since June and moved above the expansionary 50-level for the first time in September. The PMI increase was driven by new orders and higher production mainly, but employment continued to fall in September as a result of overcapacity. However, the Czech unemployment rate of 2.8% still remains the lowest among all EU member states. Business confidence stood at -16.1 in June and moved up to a positive 1.7 in September, and retail sales moved up from -12.2% year-on-year in May to -1.1% in July. Today’s calendar however included a sharper contraction of August’s retail sales of 2.6%, slightly undershooting Bloomberg’s forecasted median of a 2.3% contraction.
Although the recently published economic data points to a gradual recovery, it should be noted that this may be short-lived optimism.
The data may not paint the most accurate picture of the current economic state in the Czech Republic, seeing as the virus outlook has worsened significantly over a matter of weeks. For the shorter-run at least, this means more headwinds for the Czech koruna, with the main drivers being the domestic virus situation as well as general risk sentiment.
Author: Ima Sammani, FX Market Analyst