The Czech crown has just witnessed a taster of what the central bank, government, and business do not want to see – some uncharacteristic volatility - following the national bank’s decision not to declare an end date for the low crown. Some speculators have probably temporarily cashed in on their crown positions but there’s still a lot of cash in play and it is not necessarily a one way bet, as Patria Finance chief economist, Jan Bureš, explained.
ʺWe have seen some quite unusual activity on the market after the Czech National Bank meeting last week. Probably part of the investors present on the Czech market were closing [selling] their long Koruna positions and in some rather heavy volumes we have seen the crown weakening temporarily above 27.20 to the euro, but only for a while. Now we are back near the intervention level slightly above 27 crowns. It sort of reminded the market that there are a lot of long positions in the Koruna that have been built over the last several months and that the unwinding of these positions can cause excessive volatility potentially in both directions after the exit from the intervention regime."
How much money do you think is being speculated on the crown at the moment?
"I would estimate that between 50 billion and 60 billion euros can be now being bet on the stronger Koruna. These bets do not necessarily have to be speculative. It could also be extra hedging by the Czech oriented sector on the market so it does not necessarily have to be all speculative and wanting to get out of the Koruna after the intervention regime ends. But we can consider this amount to be a kind of a game based on the expectations that the Czech Koruna will strengthen in the future."
Basically, if you have a lot of money and you can keep it in place for several months, then you cannot lose on the Koruna can you because at some stage the intervention will end on the Koruna should rise?
Well, for now, I am not sure whether you cannot lose from long Koruna positions because, as I said, there are tens of billions of euros in positions that believe the Koruna should strengthen. But the fundamentals behind the crown are not so strong actually. If we look at the annual current account surplus [the difference between the value of goods and services imported and exported], it is just 2.0 billion crowns. "
There was a similar scenario [of the end of intervention] with the Swiss frank a few years ago, but what is the difference with what happened there?
ʺWell, the very big difference between the Czech and Swiss scenario is that the Swiss end of intervention was truly unexpected, no-one expected that. Therefore, no-one was really betting on the gains of the Swiss frank and basically the market was taken by surprise. Here, the market has been getting ready for several months for the end of intervention. The money has been flowing in in pretty large volumes. I could imagine very huge volatility but the point is where the Czech National Bank is will to limit the volatility."
And Mr. Bureš reckons that the bank will be willing to both stop the crown falling or rising too far, too fast even after the low crown policy is officially buried.
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