What Might Happen When Czechs Let Koruna Run Free: QuickTake Q&A

The koruna is on the brink of freedom. For more than three years, the Czech Republic’s central bank has shackled its currency from rising too far against the euro, in an effort to ward off deflation. In what promises to be one of the biggest currency plays in Europe this year, investors have piled into the koruna in anticipation of booking a quick profit once policy makers end that Swiss-style limit. Now it’s just about the timing. The central bank has said it will keep its formal intervention regime in place until March 31. After that, all bets are off.

Many economists argue that three years of continued economic and productivity growth mean the currency is fundamentally undervalued and expect, along with investors, that the koruna should move stronger once the cap is lifted. The central bank, however, has warned that traders may struggle to find counterparties if they all attempt to close their koruna positions simultaneously and says that the currency may actually weaken. The median forecast in a Bloomberg survey last week was for the koruna to gain 3.1 percent to 26.2 per euro at the end of the year. Investors in currency derivatives are positioned for slower appreciation, with three-month euro-koruna forwards trading at 26.88.