Speculative interest in Czech crown growing

27-05-2015

As the end of the Czech National Bank’s low crown policy draws nearer, the Czech currency is likely to be the target for considerable speculative interest with no common ground on show yet whether the Czech currency is likely to appreciate rapidly or stay more or less on its previous course.

Photo: Matěj SkalickýPhoto: Matěj Skalický The Czech crown is clearly not one of the world’s major currencies, but in the world of foreign exchange trading even the smaller bit part currencies can be worth a bet or speculative punt if the circumstances look positive.

And it appears that the allure of the Czech crown is once again growing for currency traders after a period of being on the sidelines and out of the spotlight. Figures from the Czech National Bank (ČNB) show that trading on the crown-dollar rate by banks and other financial institutions rose to more than 2.7 billion dollars in April. That is more than a third more than the trading volume a year earlier. The latest figures only confirm the trend seen from the beginning of the year of mounting interest in the crown.

April’s surge of crown trading activity is partly due to a series of fixed term buy and sell orders by banks and firms taking place over the month, the level of those contracts was twice as high as in January. And domestic economists see foreign banks keen to speculation on the evolution of the Czech crown as a major factor in the resurgent volume.

Czech importers and exporters can largely be counted out of the equation. They have limited interest in taking any daring forward positions on the Czech crown at the moment for the simple reason that they are taking the central bank at its word that its low crown policy will be in place until at least the end of 2016. Most of these companies have a 12-month horizon for how currency variations will hit their business and take the appropriate course to cushion the damage or accentuate the advantage of expected changes.

The Czech National Bank’s current weak crown policy aimed at preventing the currency from strengthening beyond 27 crowns to the euro means that bets on the evolution of the currency in the short term can only really be about how much it will weaken or strengthen in relation to this forex version of a line in the sand. Bets in other currencies than the euro clearly have more room for gain or loss but are still to some extent braked by the ceiling on the crown’s strengthening against the euro.

But the speculative opportunities in the run up to the end of the crown-euro ceiling are substantial. First of all there is the question of timing. When exactly will the ceiling on the crown’s strengthening be dropped? And will this be a gradual process with the national bank trying to encourage a gradual appreciation or be more like a jump? And then there is the question of how strong the crown will climb.

On the latter point there are clearly some major differences. On the one side, economists from some major banks see the crown strengthening to around 25 crowns/euro after the end of the central bank policy. The central bank however expects no such surge and argues that the currency will not rebound to its previous level because the low crown level has to all effects and purposes become established on markets. With such divergent stances the opportunities for some speculative currency are clearly encouraging.

27-05-2015