Top 2017 Bet on Koruna Gains Sets Czech Central Bank a Challenge

  • Goldman Sachs sees CNB pushing back pressure on koruna floor
  • Buying Czech koruna among top 2017 trades at JPMorgan, UBS

In a world where central banks are struggling to reach their inflation targets, the Czech National Bank might have the opposite problem: hitting its goal earlier than expected.

By forecasting an exit from a cap on koruna gains when inflation reaches a 2 percent target in mid-2017, the Czech central bank might find itself in a difficult spot as investors preempt the move and put pressure on the limit. The market has already started to bet on the foreign-exchange regime changing and selling the euro against the koruna is among the top trades for 2017 for JPMorgan Chase & Co. and UBS Group AG.

The Czech central bank will hold its next monetary policy meeting on Dec. 22 and expectations are for it to buy time by reiterating the floor won’t be scrapped before inflation is sustainably at the 2 percent target. The CNB expects inflation to accelerate to 2 percent in the third quarter of next year, though investors are betting it might happen sooner than that after data showed a jump to 1.5 percent for November.

“The problem with inflation reaching the target in the first quarter is the apparent predictability of the removal of the floor,” strategists at Goldman Sachs Group Inc. including London-based Kevin Daly wrote in a note to clients. The central bank might be forced to take additional measures to avoid an excessive appreciation of the currency.

“The CNB has previously stated that it’s ready to introduce negative rates to offset speculative flows and while we see this could be a possibility, it’s uncertain how effective this would be,” the strategists added.

Other strategists hold similar views.

Nomura Holdings Inc. strategists including Peter Attard Montalto:

  • Investors expect EUR/CZK weakening about 3-5% to 25.8, but see a settled rate of around 26, according to a survey conducted by the bank
  • While many are positioned already on this trade, some are still waiting in the wings so the market could yet move further
  • The bank expects the CNB to remain relaxed on the timing of an exit from its currency floor policy
  • An inflation report date seems the most likely time for a shift in policy; May or August seem the most likely dates; see an attempt to soften overshooting through intervention as more likely

JPMorgan Chase & Co. strategists including Paul Meggyesi:

  • The bank recommends selling the euro against the Czech koruna and targets a level of 26 on EUR/CZK once the floor is removed by the fourth quarter next year
  • The trade recommendation is: short EUR/CZK forward, sold at 26.6883 with expiry November 27, 2017

UBS strategists including Bhanu Baweja:

  • The bank recommends selling EUR/CZK 12-months forward
  • While there are risks of an extension into 2018, on balance the risk of a change in the FX regime now looks underpriced
  • The base case is for the floor to be removed in the second half of next year
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