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The Czech koruna’s steady ascent continued on Monday morning, after data showing inflation at its highest level in more than four years appeared to justify the central bank’s decision to lift its long-standing currency cap last week.
The Czech National Bank imposed a limit on the koruna in in 2013 in an effort to stop a strong currency from causing deflation through lower import costs. However, the economy has benefited from signs of an upturn in the eurozone in recent months, with inflation rising toward the top end of the CNB’s one-to-three per cent target range.
Data released on Monday morning showed consumer prices rose 2.6 per cent in the year to March, the highest inflation rate since November 2012. The increase was driven by surging food prices, with the price of butter increasing by more than 20 per cent, and sugar by more than a quarter. Egg prices were also 18 per cent higher.
The koruna strengthened as far as 26.499 per euro on Monday morning, and at publication time was 0.2 per cent stronger for the day at 26.508.
It has been the best-performing emerging market currency over the last week, but has behaved relatively calmly compared to the ending of similar currency limits in the past
Piotr Matys, EM FX strategist at Rabobank, predicted that the steady moves will continue, suggesting that “short positions [on Euro/CZK] will be gradually closed in the coming months, which should result in a slow rather than a sharp retracement towards the pre-peg low at 25.484 over the long-term horizon (i.e. at some stage next year)”.