The Czech koruna weakened materially after a central bank board member said the Bank could intervene in the FX market and put a floor under the currency as a way to ease policy. We think this is unlikely though.
USD: Inflation plunging
Risk assets are trading on the soft side and the US dollar remains bid due to concerns about a potential second wave of Covid-19 cases (with South Korea in focus). On the US data front, the April CPI is set to fall sharply to -1% year-on-year today, on the back of the sharp decline in gasoline prices and massive discounts in apparel. But as the Federal Reserve has already reacted forcefully to the Covid-19 crisis, negative prices and little inflation threat for quarters to come should have a limited impact on USD today (bar reinforcing the need for the low yielding environment presided over by the Fed). Elsewhere, the Reserve Bank of New Zealand will announce policy overnight and while we don’t think any more cuts are on the cards, the Bank may still opt to retain a dovish stance – if nothing else to put a cap on recent NZD appreciation.
EUR: Back to its usual trading mode
After the European Court of Justice's response to the German Constitutional court last week, the euro risk premium remains firmly contained and the currency is back to its usual trading mode - that is outperforming most of its G10 peers in down markets (only the US dollar and Swiss franc traded stronger than the euro yesterday). The lower than expected 1Q GDP from Norway pushed the krone lower this morning but with the recent increase in oil prices and its likely stability (Saudi Arabia announced further production cuts) and the Norges Bank exhausting the room for further easing following last week’s rate cut, EUR/NOK should stay below 11.30 this week.
GBP: The lack of clarity
After Prime Minister Boris Johnson's speech on the plan to reopen the economy on Sunday, which was deemed by many to be confusing, Johnson toned down his message yesterday (mainly on the back-to-work issue). As the market had already taken the Sunday message with a pinch of salt, the latest change news is unlikely to have a negative impact on GBP today (which came under pressure yesterday). EUR/GBP to stay within its multi-week trading range of 0.87-0.88.
CZK: Overdone reaction to the remote possibility of an FX floor
The Czech koruna weakened materially yesterday in response to Czech National Bank board member Tomas Holub’s comments that the central bank is contemplating an FX floor as one of the possible easing measures, should it be necessary. However, the bar for FX floor renewal is still very high in our view, with material deflation pressures likely needed for the CNB to embark on such unorthodox measures (neither ING’s nor the CNB’s base case). Also, compared to the situation in 2013 when the CNB introduced the FX floor, CZK is not overvalued. In fact, the currency is cheap vs the euro. Once the initial short-term fears of the FX floor recede, we expect EUR/CZK to head back towards the 27.00 level in coming weeks.
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