Czech Koruna in big Jump Against the Pound as CNB Drops Euro Peg
- Written by: Gary Howes
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The Czech Koruna was seen outperforming rivals after it was left to float freely on global foreign exchange markets.
The Czech National Bank (CNB) has kept their currency pegged to the Euro but have today voted to allow it to trade freely.
In a statement the CNB said:
“At its extraordinary meeting on 6 April 2017, the Bank Board of the Czech National Bank decided to discontinue the use of the exchange rate as an additional instrument for easing the monetary conditions. By taking this step, the CNB returned to the conventional monetary policy regime, in which interest rates are the main instrument.”
The Koruna was left at weaker levels as a result of the peg but will now adjust to a new equilibrium.
The Pound to Czech Koruna exchange rate fell 1.51% to reach 31.12 at the time of writing. See live graph and stats here.
The Euro to Czech Koruna exchange rate fell by a percent to reach 26.72 at the time of writing. See live graph and stats here.
Initial reaction to the CNB’s handling of the affair has been positive with analysts noting the Bank had avoided the kind of market-breaking volatility the Swiss National Bank managed to achieve when they dropped the EUR/CHF peg.
“If you want to drop a currency peg, then the CNB can show you how to do it. After dropping the EUR/CZK peg earlier today the koruna has rallied less than 1% versus the euro, and volatility has been moderate. Dismantling a long-held currency regime doesn’t need to be as volatile or panic-stricken as Swiss peg debacle back in 2015,” says Kathleen Brooks at City Index.
Where will the Koruna go Now?
Concerning the outlook, while the CZK might be moderately higher today, Brooks says there could be upward pressure on the horizon.
“Right now the spread between German and Czech 10-year bond yields is at a crucial support zone that dates back to 2014. If this spread drops further and the spread widens to more than -0.65 basis points, as you can see on the chart, then we would expect further EURCZK appreciation, potentially back towards 25.00 in the next couple of weeks,” says Brooks.
Expect the GBP to CZK rate to move higher in sympathy.
“While limited so far, we can still see some more pronounced moves if large quantities of investors “blink” and decide to close their short EUR/CZK positions,” says Viraj Patel at ING in London.
ING don’t believe the CNB is intervening given the well behaved nature of the EUR/CZK exchange rate and in their view the CNB will likely be comfortable with +/-5% EUR/CZK fluctuation in coming hours/days.
