Koruna Pause Is Only Blip for Czech Bulls, a Year After Cap End

(Bloomberg) -- A bout of weakness won’t derail a rally in the koruna, almost a year after the Czech National Bank ended a limit on currency appreciation.

Analysts forecast that any declines this year may be temporary for the world-beating currency, even if policy makers hold interest rates at a meeting on Thursday. Some investors have pared tightening bets after inflation slowed to below the central bank’s target, but Governor Jiri Rusnok has said it may hike rates later this year if the economy continues along its projected path.

The currency’s weakness in the past two months has pushed the average exchange rate this quarter to 25.4 per euro, in line with the central bank’s forecast. The monetary authority expects the currency to resume gains soon, with average estimate for 24.9 per euro in the second quarter and 24.6 in the fourth. That’s in line with economist bets for a new leg of koruna appreciation.

Here are some analysts’ views on the Czech currency:

JPMorgan Chase & Co. (Anezka Christovova)

• Sees conditions in place for renewed koruna appreciation momentum
• Recommends increasing overweight koruna positioning, targeting move to 24.8 per euro, amid “attractive” entry levels and a currency that screens as cheap across a range of valuation models
• JPMorgan sees koruna appreciating to 24.5 per euro by year-end

Morgan Stanley (James Lord, Min Dai)

• Given strong growth, near double-digit wage inflation and EUR/CZK above the central bank’s forecast, rate setters will likely resume their hawkish tone in the run-up to the May meeting, unless inflation continues to disappoint
• Expect koruna to strengthen to 25 per euro by the end of 2018
• See value in EUR/CZK should it trade above 25.5

UniCredit Bank (Kiran Kowshik)

• Elevated positioning makes the koruna a slow-moving vehicle, but “we continue to remain constructive” as it is the only currency in the European Union’s east with “a clear valuation trigger in place”
• Even if weaker-than-expected inflation data of late has provided a setback for the bullish koruna view, it is clear that the labor market remains tight and should feed into wage pressures
• Sees koruna at 25 per euro at year-end

ING (Petr Krpata, Jakub Seidler)

• Expect downward pressure on the still overvalued EUR/CZK pair to continue, due in large part to upcoming interest rate increases
• With the Czech labor market very tight, the next step for local companies to increase or retain profit margins is to improve productivity. That will continue to modestly lower EUR/CZK fair value
• Forecast 24.8 per euro for end-2018

To contact the reporters on this story: Marton Eder in Budapest at meder4@bloomberg.net, Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Anil Varma

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