The crown remains on the defensive even in the last quarter of this year. The trend weakening has been happening since April, while last month the koruna briefly looked at the level of 24.70 EUR/CZK. However, the important psychological boundary, on which the CNB actively intervened until October 2022, has not yet been breached. However, this resistance will not last long – in our updated outlook, we expect a weaker koruna both in the rest of this year and especially in the first half of 2024.
Last week, the CNB gave the koruna a boost, which, despite market bets, left interest rates unchanged. However, from our point of view, this is a short-term impulse and the Czech currency will gradually lose the positions it has gained. On the one hand, due to higher real rates in the United States and a relatively strong dollar combined with increased risk aversion. On the other hand, weaker domestic macro data (retail and industry) play an important role, which indicate a continued slowdown of the Czech economy in the rest of the year and probably a more gradual recovery in 2024.
However, the most important factor acting in the direction of a weaker koruna will be the narrowing interest rate differential. While in the Czech Republic we expect a relatively early start of rate cuts (by 25 bps in December), which will gain momentum in the course of 2024, in the eurozone and the USA we expect a longer period of their stability. During the first half of next year alone, we expect to reduce the positive interest rate differential between the CNB and the ECB by a full 200 basis points.
Consistent with this scenario is the continued weakening of the koruna exchange rate, with selling pressures expected to level off at EUR/CZK 24.90 in the first half of 2024. In the second part of next year, we assume that the koruna could regain its footing and strengthen to EUR/CZK 24.50. Compared to the CNB’s November forecast, we are slightly more pessimistic about the koruna in the medium term, but in 2025 we expect a faster recovery of the strengthening trend.
The improving fundamentals of the Czech economy should prevent more significant losses of the koruna. This is already visibly happening in the external position – both the trade balance and the current account of the balance of payments are gradually normalizing (primarily thanks to cheaper imported energies) and this trend will continue. Later next year, we also expect a revival of growth dynamics and an overall fading of significant shocks and imbalances, which is a basic prerequisite for the restoration of the long-term strengthening of the Czech currency.