Photographer: Beneda Miroslav/Getty Images/iStockphoto

Be Afraid, Central Banker Warns Speculators on Koruna Swings

Updated on
  • Czech central bank is ready to endure volatility, Rusnok says
  • Governor still sees koruna-cap exit as likely around mid-2017

Investors wanting reassurance from central banks may need to look elsewhere this time.

The Czech National Bank is ready for the market to turn “quite turbulent” after it removes its Swiss-style regime limiting currency appreciation, a decision that now appears most likely around mid-2017, Governor Jiri Rusnok said in an interview in Prague on Wednesday. The monetary authority won’t be overly concerned about short-term swings, which would be natural before the market returns to “normal conditions,” he said.

Jiri Rusnok on March 1.

Photographer: Martin Divisek/Bloomberg

In one of the sternest warnings yet by the Czech central bank, Rusnok is staring down investors who are piling into koruna in expectation of a quick payout once the cap on gains is lifted and the currency appreciates against the euro. As policy makers prepare to abandon the unconventional stimulus introduced in 2013 to ward off deflation, the Czechs are intervening in record amounts amid what some banks are calling one of the top currency trades in Europe this year.

“If we were to pledge to completely mitigate koruna swings right after the exit, then, effectively, we wouldn’t be leaving” the regime, Rusnok said. “What we’re saying is that there can be high volatility, and that it will be a period when those speculating on the koruna should be a little afraid, more than we need to be. Our pain threshold will be quite high.”

Investors’ anticipation of the return to standard monetary policy has only intensified since inflation accelerated faster than the central bank had predicted at the start of the year. With January’s price growth exceeding the central bank’s target of 2 percent for the first time in four years, the monetary authority was forced to boost foreign-currency purchases to keep the koruna from gaining beyond the imposed limit of around 27 per euro.

ING Groep NV estimates that the central bank bought foreign currencies worth about 19.5 billion euros ($20.6 billion) in the first two months of this year, exceeding the 16.9 billion-euro intervention volume for all of 2016. Rusnok said the bank saw the koruna as “overbought.”

Pressure on the exchange-rate cap, visible in the currency-derivatives market, peaked in the first two weeks of the year, with the 12-month euro-koruna forward strengthening to as far as 26.5 on Jan. 11. The contract has since slipped back in a sign of investors paring bets on appreciation. The Czech currency was little changed at 27.02 versus the euro on the spot market as of 5:26 p.m. in Prague, while the 12-month forward erased some of its losses on Thursday and returned to 26.72.

Consumer prices have been significantly influenced by the volatile cost of food as well as some one-time factors, and Rusnok said inflation reaching or even slightly exceeding the target isn’t an automatic trigger for a policy change. The bank wants to avoid a premature exit and needs to make sure it won’t need to go back to non-standard tools again, he said.

“We think that allowing inflation to exceed the target a little bit, within the tolerance band, is the right approach for leaving the foreign-exchange commitment,” Rusnok said.

Read more on Czech preparations for ending intervention regime

The so-called hard pledge that the central bank won’t scrap the currency cap before the end of the first quarter will expire in a few weeks. After that, anything can happen, Rusnok said. But he still considers the current outlook for leaving the exchange-rate cap at around the middle of the year as appropriate.

The rate-setting panel will analyze “all aspects and information” with even greater intensity as it moves closer to the policy change, he said. The board may make the move either in a regular monetary-policy meeting or at an extraordinary session, and since the actual decision will be the result of a vote, it won’t be possible to announce it before the ballot takes place, according to Rusnok. 

What won’t happen is the type of shock that the Czechs’ Swiss counterparts unleashed on investors when they suddenly dropped their cap and sent the franc soaring more than two years ago, he said.

“So naturally, there may be some element of surprise,” the governor said. “But we have proven our transparency by clearly communicating that there will be an exit from this policy, that it will happen sometime after the first quarter. We are certainly not following the Swiss model of a surprise exit.”

— With assistance by Krystof Chamonikolas

(Updates with koruna prices in seventh paragraph.)
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