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April 7, 2017 www.intellinews.com I Page 3
Koruna rises 2% as Czech National Bank scraps currency cap
on a jump in the value of the koruna when the regime is lifted, about the timing of the lifting.
However, the CNB surprised many by ending the regime almost immediately. The move, which was decided at a non-monetary policy meeting, appears to have been pushed by the continued ‘CZKexit’ frenzy, the rising level of forex reserves due to spiralling intervention demands, and a surge in inflation around the turn of the year.
The CNB has been scrambling to ameliorate the effects from the inflows of speculative capital, noting that it still stands ready to intervene
after the cap is removed. It has also insisted the currency could actually drop as investors seek to unwind their huge positions.
By early trade on March 7, the had climbed almost 2% against the euro to CZK26.61, falling below the CZK27 mark for the first time since the limit was imposed in November 2013. Trading volumes were said to be 50 to 100 times higher than typical in the minutes after the CNB released its decision.
“The discontinuation of the use of the exchange rate as an additional monetary policy instrument means that the koruna exchange rate will move according to supply and demand on the foreign exchange market,” the CNB said. “As a result, it may fluctuate in either direction in the short term. The CNB stands ready to use its instruments
to mitigate potential excessive exchange rate fluctuations if needed.”
Although mostly surprised by the speed of
the move, analysts largely expect the koruna
to appreciate through the year. “The move came earlier than we and most others had anticipated,” said Capital Economics, which had
forecast the regime would last until May. “We will let the dust settle before revisiting our forecasts, but as things stand we think the ‘fair value’ of the currency is around 25.5/€ (5.5% stronger than its current rate) and we expect it to settle around that level by year-end.”
“We forecast €/CZK at 26.50 for the second half of the year on average and 25.50 in 2018,” said Raffaella Tenconi at Wood & Co. “Bigger currency appreciation in our view is unlikely as there is
a sizeable bond positioning that will likely be gradually liquidated and beyond 3-4% appreciation a year the CNB will begin to question whether it is sustainable for the fundamentals of the economy. We expect a mild rate tightening cycle to start in the second half of the year.”
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