Czech National Bank provokes fresh CZKexit speculation

Czech National Bank provokes fresh CZKexit speculation
Estimates suggest CZK65bn (€2.4bn) is sitting in koruna-denominated assets awaiting the end of the cap.
By bne IntelliNews March 31, 2017

The Czech National Bank offered a little grist to the mill of market commentators predicting an imminent removal of its cap on the koruna at its monetary policy meeting on March 30, but not much. Still, it was enough, it seems, to send speculation racing in all directions regarding the timing of the move.

The meeting was the last before the end of the central bank’s “hard commitment” to keep the currency pegged at CZK27 to the euro through the first quarter of the year. This has raised another bout of CZKexit speculation among investors hoping for a jump in the value of the koruna when the regime is lifted.

The keenest have even moved their expectation for the move to come within days, citing the surge in inflation that started in December. Analysts at KBC say they “expect that the CNB will exit from the… regime at the beginning of April”.

However, the comments of the CNB following the meeting remained cautious, even if they opened the way for further speculation that the regime could be dropped at any moment. While the MPC removed its recent mantra that the cap would likely be lifted in “mid-2017”, it also noted weaker-than-forecast GDP and wages growth.

That may support the widespread forecast that the scheduled CNB meeting on May 4 is the most likely date for the move. At the same time, the French election could even prompt a delay to June.

“In so far as there is a risk of an earlier lifting of the cap, we think the thing to watch is the next inflation data release on April 10,” writes Liam Carson of Capital Economics.

The MPC statement suggested that the council is indeed preparing to lift the cap. However, it also repeated that it is yet to be convinced that inflation is sustainable enough to stick close to the target of 2%. The recent rises in the CPI have been largely driven by erratic commodities prices, although the CNB admits it sees signs that domestic demand is now also having some effect.

Yet, as Raffaella Tenconi at Wood & Co notes, the CNB’s calculations – or its commentary – look a little off. The statement claimed inflation has surprised to the upside recently due to food and gradually rising demand-led price pressures.

“Note though,” writes Tenconi, “that Brent oil price is below $50, while the CNB projection indicates $57, so the overall inflation forecast should still be correct even with the recent upside surprises. GDP instead has been weaker than expected, chiefly due to investment.”

While the end of the “hard commitment” has raised the pressure on the CNB forcing it to raise intervention once more, the jury remains out on what will happen to the koruna once the cap is shed. On the one hand, macro-economic data suggests a sharp rise could be on the cards. Carson predicts the currency could push to CZK25.50 to the euro by the end of the year.

On the other, the CNB says it remains ready to continue to intervene to quell volatility or a rapid gain in the value of the currency. At the same time, with estimates suggesting CZK65bn (€2.4bn) is sitting in koruna-denominated assets awaiting the shift, investors could struggle to unwind their positions. That could even see the currency drop, suggest some.

To the surprise of no one, the CNB retained the benchmark interest rate at 0.05%.