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For any ordinary currency, a 0.3 per cent decline is not a big deal. The Czech koruna is not an ordinary currency.

Its exchange rate with the euro is showing highly unusual signs of life, with the euro lifting up from 27 to the euro for the first time in months.

It peaked at 27.23 yesterday, the highest since September 2015 in the first sign of doubts over whether the country’s central bank will scrap its limit on the currency after all.

To recap:

Speculators have been rushing into bets that the central bank will soon (possibly very soon) end its policy of preventing the euro from trading under 27 to the koruna. The central bank has been keeping the koruna artificially weak like this since 2013 in an effort to deflect deflationary pressures. But as those deflationary pressures have melted away, bets have been piling up that the central bank will fold before its self-imposed mid-year guidance.

Yesterday, the central bank kept interest rates on hold, as expected, and kept the currency limit in place, also as expected. (It has vowed not to move before the second quarter, which has not quite started.)

But…

In its press conference following the decision, it said it had doubts over whether the recent run-up in inflation will last. From its statement:

The second-round effects of the faster increase in inflation observed so far may act in the inflationary direction, although this increase is due partly to one-off factors whose first-round effects on inflation will unwind naturally within one year. By contrast, the lower-than-forecasted growth of the domestic economy and wages in the business sector at the close of last year and the current drop in world oil prices are anti-inflationary risks.

So, maybe an imminent break in the floor is not such a sure-fire bet after all.

Says Commerzbank:

This portrays a less sure-footed [central bank] than we heard from just a month ago. This change of rhetoric, at the margin, probably created the [drop in the koruna] – perhaps a fraction of ‘impatient’ speculative positions headed for the exit.

From our point of view, the base case is still for the central bank to exit the floor sometime in April or May. The statement did mention that the decision would be taken at a board meeting. This is different from Governor Jiri Rusnok’s earlier comments to the media that it could be any regular board meeting or an extraordinary meeting. But, we do not take this to mean a pre-scheduled rate setting meeting such as the one scheduled for 4 May or 29 June. The bank board meets weekly – and in our view, any of them could qualify.

Could the central bank defer exit beyond Q2? This has become unlikely now because of continued speculation by the market against the floor and the consequent heavy intervention requirement to keep it in place. We would imagine it would want to end it sooner rather than later.

Copyright The Financial Times Limited 2017. All rights reserved.
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