No End in Sight for Koruna Interventions as Czech GDP Booms

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Chart: Czech Currency Cap Under Pressure

The Czech National Bank looks set to keep wrestling with investors over its cap on the koruna’s gains.

Policy makers sold the local currency on Friday for the first time since 2013 as a four-month rally took the koruna to within 0.1 percent of 27 per euro, a threshold the central bank has pledged to defend. Forecasts for the Czech economy to grow at the fastest pace in eight years in 2015 mean traders will keep testing the central bank’s resolve to maintain the limit.

“The CNB will now likely have to intervene quite often as the economic fundamentals keep pushing the koruna to stronger levels,” Marek Drimal, an economist at Komercni Banka AS in Prague, said by phone on Monday. “With practically unlimited firepower, it should have no difficulty defending the floor.”

The intervention is a sign that pressure is mounting on the central bank to defend its policy of deliberately keeping the koruna weak, originally designed to ward off deflation, as consumer prices accelerate for the fourth month to 0.8 percent in June. Policy makers insist the cap needs to stay in place at least until the second half of 2016 to make sure that inflation trends toward its 2 percent target.

The currency gained less than 0.1 percent to 27.061 by 2:51 p.m. in Prague, after declining 0.1 percent yesterday. It’s advanced 2.2 percent this year, including 0.8 percent in July alone.

‘Unlimited Volumes’

The CNB is ready to “automatically intervene for an unlimited time and in unlimited volumes to keep the koruna rate near the level of 27 per euro,” the bank said in an e-mailed statement on Monday. It declined to comment on the volume of koruna sold or the exchange rate and said it didn’t sell the local currency that day.

The currency slid to as much as 28.5 per euro in January as Czech inflation hovered at only 0.1 percent, boosting speculation the central bank would shift the currency limit to an even weaker level to avoid deflation.

As consumer prices instead picked up pace in the following months, the exchange rate rallied 5.3 percent from that trough. On June 25, CNB Governor Miroslav Singer said the probability that policy makers will weaken the barrier has declined, giving traders even more reason to test the barrier.

“The general appreciation trend is fully justified by positive developments in the Czech economy and the fact that the market no longer fears the CNB could push the floor to a weaker level,” Jakub Seidler, the chief economist at the Prague-based unit of ING Groep NV, said by phone.

‘Bit Harder’

Gross domestic product expanded 4 percent in the first quarter from a year earlier, an acceleration from 1.3 percent in the previous three months. Assuming the koruna limit stays in place, inflation will reach the target in the third quarter of next year, the latest CNB forecast shows.

The central bank doesn’t publish its trading strategy or details of individual trades, Katerina Bartuskova, a spokeswoman for the regulator, said by e-mail yesterday.

The wording of the commitment signals the central bank may step into the market at a slightly different level every time and that it may tolerate individual trades “just below” 27, according to Drimal of Komercni Banka.

“It’s a bit harder for investors to bet on koruna gains as they can’t be sure when the CNB strikes again,” he said. “The CNB probably intervened in a very small volume, confirming expectations that it will only defend the floor without trying to weaken the koruna.”

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