Czech Currency Speculators Warned of ‘Bumpy Road’ by Hampl

Updated on
  • Central banker warns koruna can gain or weaken after cap exit
  • Euro-area inflation argues against ending cap soon, Hampl says

Investors hoping for a quick payoff on speculation of an early end to the Czech currency cap, be warned: it’s going to get choppy and officials won’t be rushed.

That’s the message from central bank Vice Governor Mojmir Hampl, who sees no pressure to hasten the country’s biggest monetary reversal in more than three years and foresees a “bumpy road” ahead for anyone trying to bet on the matter.

“Data coming from the economy appear to be confirming the current forecast, which envisages the most likely moment for the exit in around mid-2017,” Hampl said in an interview on Wednesday. However, “I wouldn’t rule out that mid-2017 will stop being considered as the most likely moment for the exit, and that this most likely moment could move to the second half of the year,” he said.

While inflation has been accelerating faster than policy makers in Prague had anticipated, hitting their 2 percent goal in December, that’s not an automatic trigger for ending the Swiss-style currency cap, according to Hampl. Rising consumer prices in the euro area provide a reason against a quicker exit from the intervention regime, Hampl said, and also reaffirmed what the bank calls a “hard commitment” to keep the currency limit at least until the end of March.

Market Wagers

The Czech inflation spike at the end of last year has triggered increasing koruna purchases by investors betting the end of the currency cap is near. While the exact timing of scrapping the unconventional monetary stimulus isn’t yet known, quick koruna gains after the change are far from guaranteed and the central bank will seek to prevent excessive currency swings, according to Hampl.

“I wouldn’t be absolutely sure that there is only one way in which the koruna FX rate can go after we leave the exchange-rate commitment,” he said. “I wouldn’t be surprised even by some currency depreciation. I’d expect a more volatile, bumpy road to a new equilibrium.”

Bets on koruna appreciation are visible in the derivatives market, where twelve-month forwards dropped to as low as 26.51 per euro this month from 26.73 at the end of December. The spot-market exchange rate has been stuck near to the cap level of around 27 per euro for months, trading at 27.02 as of 1:08 p.m. in Prague, while the one-year forward contract rose as high as to 26.70 on Thursday.

Hampl rejected arguments aired by some analysts that accelerating euro-zone inflation could be a reason for quicker abolition of the unconventional policy. A key measure to watch is whether Czech consumer prices rose enough -- relative to the euro area -- to reflect the initial koruna depreciation versus the single currency after the cap was imposed in November 2013, he said. And that hasn’t happened yet, according to Hampl.

“Everybody should be aware of the fact that when euro-zone inflation started accelerating relatively rapidly in the recent past, it should be more of a reason for us to exit later, not sooner,” said Hampl. “This is a big part of the question of timing.”

While the Czech intervention regime was partly modeled on the Swiss cap example, the important difference is that policy makers in Prague have always signaled when they thought the currency shackles will eventually be removed, according to the vice governor.

“We have been as transparent as possible, always showing the market the potential timing of the exit,” he said. “If it was a Swiss-style surprise, no one would have any chance whatsoever to be asking these questions” about the outlook for the cap removal.

The central bank’s language may become slightly more ambiguous about the exit exact timing as it approaches the decision because the ultimate result of the board’s deliberations will be based on policy makers’ assessment of inflation trends and the price-growth outlook, Hampl said.

“For me, this would be caused by the nature of the situation because I simply will not know for certain what the exact date will be,” he said. “We’ve always said we need to be sure that there is sustainable fulfillment of the inflation target over the medium-term horizon and that we have a very high degree of certainty that we won’t have to return to this non-standard policy.”

— With assistance by Michael Winfrey, Andrea Dudik, and Craig Stirling

(Updates with comments on inflation starting in eighth paragraph.)
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