Lifting of koruna cap encouraged by ‘overbought’ market – Czech National Bank

The Czech National Bank wanted to take advantage of the “overboughtness” of the koruna to lift its longstanding currency cap earlier than expected, minutes from last week’s extraordinary policy meeting reveal.

The bank imposed a limit on the koruna in 2013 in an effort to prevent deflation caused by lower import costs, but last week it removed the cap a little earlier than originally scheduled, arguing that “the conditions for sustainable fulfilment of the 2 per cent inflation target in the future had been met”.

Speculators had piled into the koruna ahead of the decision, counting on a swift appreciation against the euro as soon as the cap was removed. However, the koruna has rallied only 1.1 per cent since the announcement last Thursday.

While some investors may have been surprised by the relatively calm reaction, the CNB said it was expecting it, predicting at its meeting that buyers had already maxed out. “The apparent ‘overboughtness’ of the koruna market would prevent the exchange rate from appreciating sharply,” it said.

The central bank was in a good position to know: It had been buying euros at a runaway pace to absorb the impact of inflows.

The CNB made clear in its statement last week that it was prepared to intervene to prevent an excessive rally in the currency, and the minutes showed it would be willing to re-implement a more long-term cap.

The bank’s board said the policy had “proved effective”, and said “renewed use of the exchange rate or some other suitable unconventional instrument could not be ruled out”. However, it added that “this was highly unlikely to happen in the near future”.

At publication time the koruna was 0.11 per cent weaker for the day, at 26.7733 per euro.