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Feel the burn.
Today, the Czech central bank reported that its currency reserves have shot up to $111.7bn, a gain of 7.5 per cent that builds on a 21.24 per cent accumulation in January.
For more than three years now, the central bank has maintained a policy of preventing the euro from trading under CKZ27, setting a so-called floor at that level judging that with interest rates already at rock bottom and appetite for negative rates extremely low, it has no other option than to use artificial currency weakness to keep inflation on track.
But now, with inflation picking up, some see good cause for the limit to expire sooner rather than later. Czexit, here we come.
But for a small and usually sleepy currency like this, a bust of serious drama does seem to be on its way.
As Anders Svendsen at Nordea points out in a note:
FX reserves have increased more than 25% in just two months. The only remaining question is when the EUR/CZK floor will be abandoned.
The increase in FX reserves in February was the second-largest on record and direct FX interventions in January were the largest on record.
So, when will it jump? Mr Svendsen says:
The 30 March meeting is most likely out of the question since it is still within Q1.
The 29 June meeting could see extreme pressure given the CNB’s communication of a mid-year abandoning of the FX floor and we find it likely that the central bank will not risk that unless it has pre-committed to using other tools to deter speculation.
The 4 May MPC meeting or a between-meetings decision thus seem more likely.
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