Koruna May Erase Most of July Gain After Best Month in a Year, BNP Says

The Czech koruna may erase more than a half of its July gain against the euro in the next two weeks as the central bank will probably try to talk down the currency to protect the export-led recovery, according to BNP Paribas SA.

The world’s best-performing currency this month may weaken to 25.50 per euro from 24.79 today, BNP Paribas analyst Elisabeth Gruie said by phone from London. This would represent a 2.8 percent decline after the koruna strengthened 3.6 percent this month, its biggest monthly rally in a year.

Policy makers may seek to weaken the koruna at their Aug. 5 meeting on concern that its strength will hurt exporters and may lead to excessive disinflation, Gruie said. Exports, including cars from the Czech units of Volkswagen AG and Hyundai Motor Co., account for 70 percent of the Czech economy, which the Finance Ministry forecasts will grow 1.6 percent this year after shrinking 4.1 percent in 2009.

“Speculation over a rate cut could rise in light of the surge in the koruna,” Gruie wrote in a report earlier today. “While we do not expect them to cut rates next Thursday, at least verbal intervention looks increasingly likely.”

All analysts in a Bloomberg survey expect the main interest rate will stay at the record low of 0.75 percent. The inflation rate was 1.2 percent in May, at the lower end of the 1 percent to 3 percent central bank target range.

The koruna reached its strongest level since 2008 two days ago, fueled by the government’s promise to cut its budget deficit and a rally in emerging-markets assets. The MSCI Emerging Markets Index of equities climbed for eight straight days before dropping today and is up 7.5 percent this month, its best since March.

‘Surprised’

“There are some businesses clearly suffering from the move” in the koruna exchange rate, Gruie said.

Policy makers forecast the koruna will trade at an average rate of 25.1 per euro in the second half of this year, according to data on the central bank’s website.

“We are surprised that central bankers are remaining silent,” economist Jan Vejmelek at Komercni Banka AS, the Prague-based unit of Societe Generale SA, wrote in a report today. “We will hear their comment on Thursday at the latest. A verbal intervention against the strong koruna can be expected.”

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

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