The Czech koruna may strengthen further as traders test the central bank’s resolve to take steps to support the economy by weakening the currency, said Jan Vejmelek, chief economist at Komercni Banka AS.
The koruna strengthened 0.2 percent to 24.809 per euro by 2:34 p.m. in Prague, extending its gains this week to 1 percent, the most among more than 170 currencies tracked by Bloomberg. Czech 10-year bond yields were steady at 2.28 percent today, three basis points more than a record low hit on Oct. 15, data compiled by Bloomberg show.
The currency has gained 0.7 percent since Czech National Bank Governor Miroslav Singer said on Sept. 27 that policy makers are prepared to weaken the koruna to revive the stalled economy. The CNB cut its benchmark interest rate to a record-low 0.25 percent on the same day.
“The koruna is more likely to test stronger levels as the market will try to provoke the CNB,” Vejmelek said in a phone interview from Prague today. “The CNB may intervene if the koruna gains significantly beyond 24.50, the recession deepens and deflation trends intensify.”
The economy shrank 0.2 percent in the second quarter, its third quarterly contraction, as the debt crisis in the euro area has hit exports, which account for about 75 percent of the country’s gross domestic product, according to state data. Government cuts in investments and higher taxes to rein in the budget deficit have hurt domestic demand.
With interest rates approaching zero, the CNB may use other tools if it needs to ease policy further to counter risks of deflation and “it would most likely be the exchange-rate channel,” Singer said on Sept. 27.
“The CNB targets inflation, not the exchange rate,” Marek Petrus, the central bank’s spokesman, said today by phone. “It’s up to the central bank’s board to assess whether or not further policy loosening is needed.”
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