The Czeck koruna rallied on Tuesday after July CPI surprised to the upside. The magnitude of inflation upside was, however, quite modest: 2.2%y/y vs. 2.0%y/y expected. The month-on-month rate of change was sharper (0.7%), but this rate of change works out to a more modest 0.5% m/m after seasonal-adjustment. The 0.5% m/m follows a flat reading in May and a -0.3% m/m decline in June; the exponentially smoothed month-on-month rate of change reached 0.23% in July, Commerzbank’s FX analyst Tatha Ghose notes.

Data may be considered mildly FX-positive

“In short, the trend is not worrying at all, although the July data reversed the extreme dovish readings of the prior two months. We view these variations to represent mainly statistical noise plus some minor administrative and other seasonal changes.”

“In terms of the National Bank’s (CNB’s) rate cuts, we do not think that this changes the practical picture much – CNB will still likely cut the rate in 25bp steps at forthcoming meetings. Perceptions had become somewhat extreme that rates might be cut to quite a low level by the end of the year – for example, to 3.00% – such expectations will probably now be removed from the market.”

“From a practical standpoint, we think that the data will strengthen CNB’s ability to justify an end to rate cuts when it finds appropriate. Hence, the data may be considered mildly FX-positive, in line with the market reaction.”