Coronavirus situation contributes to weakening of Czech currency

04-03-2020

The coronavirus has impacted global stock and commodities markets and also hit the Czech crown. It stood at below 25 to the euro in mid-February, its strongest level since 2012. Since then, however, the crown has reached even above 25.50 to the common European currency.

Photo: Štěpánka BudkováPhoto: Štěpánka Budková This week the situation has calmed somewhat, after European governments and central banks made it clear they would step in to help economies if required, the news website iHned.cz reported on Wednesday.

That said, the crown did not just weaken due to investor flight toward safe shares – an anticipated rate cut by the Czech National Bank has also been a factor, Jakub Seidler, chief economist at ING Bank in Prague, told iHned.cz.

Mr. Seidler said that traders assume a reduction in key interest rates is inevitable, a move forced on Czech central bankers by the fact that the world and domestic economies are slowing and the main central banks are cutting their rates.

In the case of the Czech crown, the weakening has been accentuated further by the fact that, in 2016 and 2017 in particular, a large number of international investors bought the currency in anticipation of it appreciating once a CNB policy of keeping it artificially low was abandoned, iHned.cz said.

Between 2013 and 2017 the central bank’s policy kept the rate at above 27 crowns to the euro in a bid to support exports and growth.

By contrast, when panic surrounding Covid-19 hit international markets investors got rid of their crowns, contributing to its loss of value, iHned.cz said.

Prior to the coronavirus crisis, the crown had made gains against the euro and stood at 24.80 to the European currency around three weeks back. The crown had benefited from, among other things, a calming of trade tensions between the US and China.

What’s more, buyers were also drawn to the crown by the possibility of a more attractive appreciation of free money, thanks to higher interest rates compared to the euro area.

The currency was boosted further in early February when the CNB increased its key interest rate from 2.0 to 2.25 percent, due to rising inflation.

iHned.cz said analysts were struggling to predict what would happen next. Conseq analyst Michal Stupavský, for instance, said it would depend on when the spread of the coronavirus stabilises.

This will affect global supply chains and therefore economic activity in general, he told the news site.

04-03-2020