Czeched-Out: CNB Drops Peg With The Euro
FOREX.com | Apr 06, 2017 13:28
If you want to drop a currency peg, then the CNB can show you how to do it. After dropping the EUR/CZK peg earlier today the koruna has rallied less than 1% versus the euro, and volatility has been moderate. Dismantling a long held currency regime doesn’t need to be as volatile or panic-stricken as the Swiss peg debacle back in 2015.
We mentioned last Tuesday that the CNB could drop the peg at any time after the bank failed to commit to maintaining the peg after April 1st. Doing it sooner rather than later was a good call from the CNB for a few reasons:
It potentially limited the amount of speculative capital flowing into the CZK on the back of expectations that the koruna would rally once the peg was dropped, this has helped to limit volatility on Thursday.
The CZK weakened last Thursday after the CNB failed to drop the peg at its schooled rate-setting meeting, this shook out some of the long CZK speculative interest, which also helped to keep volatility contained.
The bank had spent 4 months telling the market that the peg would be dropped, 10/10 for communication, taking the market by surprise a la SNB was a move wisely avoided by the CNB.
Positioning was not as extreme in EUR/CZK as it was in EUR/CHF, but there was still approx. $65bn of speculative inflows in EUR/CZK. The CNB should be praised for the smooth transition from a pegged currency to a floating one.
So where does the CZK go now?
As mentioned, the CZK has rallied only moderately on the back of today’s CNB action, and it isn’t even the best performing currency in the EMEA space. The timing of dropping the peg has been pre-emptive: the economy isn’t too hot that the CNB desperately needs a stronger currency, neither are bond yields too high, which means the CNB doesn’t have to worry about hiking interest rates. Instead, the CNB can keep a steady ship for now, although it will want to have one eye on inflation, which has risen to 2.5%, the highest level since the end of 2012. We don’t expect the CNB to hike interest rates yet, although this could be on cards for the summer months. If the CNB does hike rates then we would expect CZK appreciation against the euro.
Is the post-peg Swissie price action a blueprint for the CZK?
Although we think that the CNB masterfully avoided a SNB–style debacle today, the CZK may not be able to avoid the same fate as the CHF. The Swissie has remained stronger versus the euro since its peg was dropped in 2015, and EUR/CHF has not managed to get back to 1.20, it is currently trading at 1.07, and has lost 3.6% in the last 9 months as the ECB embarks on an extension of its QE programme. The CZK could also trade with an upward bias while the ECB maintains its ultra-lose monetary policy, and we think it will be tough for EURCZK to get back to 27.00 in the aftermath of this currency shift.
Get The App
Upward pressure on the horizon:
The CZK might only be moderately higher today, but there could be upward pressure on the horizon. Right now the spread between German and Czech 10-year bond yields is at a crucial support zone that dates back to 2014. If this spread drops further and the spread widens to more than -0.65 basis points, as you can see on the chart, then we would expect further EURCZK appreciation, potentially back towards 25.00 in the next couple of weeks.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.