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“Exit, exit, exit!” fizzes Dutch bank ING. Clearly, the excitement over Europe’s most arcane currency battle is reaching feverish levels.
The tussle over the Czech Republic’s upper limit on its currency – the koruna – has been fascinating
nerds specialist observers, including hedge funds, for months. Thanks in part to the soaring price of potatoes (no, really), the question over when the Czech central bank will buckle is now becoming more intense.
Right now, the Czech National Bank prevents the euro from trading under 27 to the koruna by buying foreign currencies. But with reserves building at a blistering pace and inflation picking up fast, the case for dumping the limit before the mid-year guidance is growing more credible.
In his apparent excitement, ING’s Petr Krpata writes:
In our view, the optimal timing for the CNB’s exit from the FX floor is the first week of April (during an extraordinary monetary policy meeting), ahead of the publication of the Czech March CPI on 10 April (likely to be again above the 2% target).
In our view, the CNB FX interventions are too high (€45bn since September 2016), its balance sheet is ballooning and unlike in prior years, the current FX intervention is no longer justified from both an economic and inflation targeting point of view. Waiting beyond 10 April will likely induce further inflows into the koruna and raise the issue of the likely future accounting losses for the CNB and CNB capitalisation levels.
So, mark your diaries.
The bank adds:
We expect the CNB to look though the initial post exit EUR/CZK volatility, at least during the first hours/days after the exit. We believe that the CNB will be comfortable with initial EUR/CZK moves in the scale of around +/- 5%, but moves worth close to double digits (10%+) would likely make the central bank more uncomfortable.
Commerzbank has also pulled forward its expected exit point. Having previously pencilled in no move before the end of June, it now thinks the second quarter is in play. Writes Tatha Ghose:
Earlier, we had no strong reason not to go with [the central bank's] guidance that it would end the floor around the middle of the year. But since then, two notable developments have occurred:
First, Czech inflation has surprised powerfully to the upside.
Secondly, the ECB itself appears to be taking a more constructive view of growth in the euro zone. A clear shift in judgement about the balance of probabilities certainly appears to have occurred.
The central bank has a ‘hard guidance’ to keep the floor until the end of this month. Thereafter, it has no formal commitment, only ‘soft guidance’ that the most likely timeframe for exit is around the middle of 2017.
Now, the only reason that CNB would hold on to the floor beyond the end of Q1 would be to ensure that the inflation upswing is ‘real’ and not a temporary commodity price driven spike. But, if this difference – between prompt exit after the end of Q1, and later exit after the end of Q2 – will be dictated by evolving judgement about the sustainability of higher inflation, then in our view, recent CPI data and ECB remarks are unambiguous in their implication.
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