Koruna Volatility Shows Danger Zone for Cap Exit Over Next Month

  • Bets on price swings jump between one-week and one-month tenor
  • Czech central bank has it could re-float koruna at any time

Currency options are giving an insight into investors’ expectations for the end of the Czech central bank’s cap on koruna gains.

The implied-volatility curve for the euro-koruna pair shows a steep jump between one-week and one-month tenors, indicating heightened concerns of greater price fluctuations between those two dates. While that time frame also includes the first round of voting in the French election, it’s in line with a Bloomberg survey that shows 13 out of 22 analysts predicting the intervention regime that limits appreciation at 27 koruna per euro will end in April or at the May 4 monetary policy meeting.

The Czech National Bank said on March 30 its Swiss-inspired stimulus program could end any time.

The timing and manner in which the central bank ends the currency cap is of key importance to foreigners who have piled as much as $65 billion of speculative capital into Czech assets, including bonds with negative yields, on hopes the koruna will appreciate. Policy makers last week abandoned their previous mid-2017 guidance for ending the program, inserting a degree of unpredictability that helped weaken the koruna the most in two years that day, as some investors decided to close their long-koruna trades.

“The koruna is overbought, although most market participants are aware of that,” Ceska Sporitelna AS strategist Miroslav Plojhar wrote in a report to clients on Tuesday. “Nervousness and exchange-rate swings may increase if the CNB waits with the exit.”

The current short-term steepness of implied volatility curve is in contrast with the end of last year, when there was a far smoother progression between tenors.

The koruna’s implied volatility curve has changed shape since the end of 2016.

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