Recently, speculation has emerged in the market about an early surprise exit in February 2017, in light of inflation returning to target and sizable speculative inflows fuelling the need for increased CNB FX interventions.
We do not expect such an early exit and instead look for a floor removal in mid-2017, when inflation sustainably reaches the CNB's target. However, with the recent inflation developments, there is considerable risk of an exit as early as Q2 17.
We recommend corporates (DKK, SEK, NOK and EUR based) hedging CZK payables increase the hedge ratio and duration on CZK hedges via FX forwards.
If we are right that the floor will not be removed in February, we see potential for a temporary rebound in EUR/CZK forward points, creating an entry opportunity to hedge payables via FX forwards.
Importantly, we expect EUR/CZK forward points to move down further over coming months as the exit draws nearer, meaning that it will become even more expensive to hedge CZK payables in the future.
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