When the Czechs Said They're Not the Swiss, They Really Meant Itby
The Czech central bank went the extra mile to convince investors that it’s not like its Swiss counterpart, and then it showed everybody why.
Six weeks after policy makers in Prague removed the regime limiting currency gains, the koruna has barely moved and remains one of the least volatile currencies in the world. This compares with the sharp gain of the Swiss franc after that country’s monetary authority abandoned its formal currency cap in January 2015.
While the Swiss policy reversal came as a shock -- and caused billions of dollars of losses to some investors -- the Czech National Bank had long flagged the approaching end of its unconventional stimulus, even if it was forced to delay the exit several times before it eventually let the koruna float freely again.
“In our case, the intensive communication strategy, when we were communicating every step and what we wanted to achieve, worked very well,” rate setter Vojtech Benda said in an interview on Tuesday. “This prepared the market and the economy for the removal of exchange rate commitment and that’s why in the end the exit was basically a non-event for the currency.”
It’s true that the two currencies have big differences. As a global safe haven with a highly developed investment industry and stock market that’s 60 times bigger than the Czech bourse, the franc’s average daily trading volumes dwarf those of the koruna. Also, lots of investors had taken short positions in the franc, expecting the Swiss National Bank to keep its currency regime in place. That exacerbated the franc’s jump when the limit fell and traders had to cover their positions.
In contrast, Czech policy makers repeatedly warned investors both that they would end the cap and that large bets on appreciation would limit gains once they did. Investors had poured as much as $65 billion into Czech assets -- including bonds with negative yields -- and many are now struggling to find enough koruna buyers to take profit.
“The development shortly after the exit was more-or-less in line with our expectations,” Benda said. “The koruna has gained, but much less than predicted in some extreme scenarios. One of the reasons is that the accumulated speculative positions, as well as hedging by exporters, created a buffer that’s now preventing a more marked appreciation.”