Another Central Bank Throws In The Towel: Czech National Bank Ends Currency Cap, Floats Koruna

Tyler Durden's picture

Four months ago we showed that according to 6 month EURCZK forwards - driven by a recent surge in Czech inflation - the market was convinced the Czech central bank would end its Koruna peg to the Euro some time before the summer.

As ING stated at the time, “It shows that the market is positioning against the CNB floor more intensively, as accelerating inflation is increasing the odds of the approaching exit. The Dutch bank said it expected the currency regime to be scrapped around April or May, with annual inflation forecast to climb from 1.5 per cent to 1.9 per cent in December – close to the central bank’s 2 per cent target.

“If the intensity of interventions saw during the first days in January continues in the first quarter of 2017, total interventions in the quarter might easily overcome the whole 2016-levels”, he added.

* * *

Moments ago all those traders who bet heavily on an end to the currency peg were rewarded when the Czech National Bank announced that just like the SNB over two years earlier, it ended its regime limiting koruna appreciation, in the process setting in motion one of this year’s biggest currency trades which according to Bloomberg has attracted as much as $65 billion in estimated capital. The announcement caught some by surprise as it came during a non-rate setting meeting, diverging from the original view of it being done at a scheduled monetary policy meeting in May

In anticipation of the peg's end, investors betting on koruna gains had poured into Czech assets, boosting foreign capital inflows in multiples of the levels normally seen in the country’s balance of payments. But, as Bloomberg adds, at least some of the speculative capital fled the koruna after the central bank stopped providing guidance at the end of March on the likely timing of the exit. The koruna has since shown volatility not seen in years.

The central bank’s board voted to exit the Swiss-inspired intervention regime at a meeting in Prague on Thursday, removing a policy that kept the koruna weaker than 27 per euro for more than three years. The decision, announced in a statement on the bank’s website, came a week after its pledge to keep the one-sided peg in place expired in March. It triggered moves sending the koruna both above and below the level of the cap.

 “The CNB stands ready to use its instruments to mitigate potential excessive exchange rate fluctuations if needed,” the bank said in the statement. The monetary authority will hold a news conference at 2:15 p.m. in Prague.

The seven-member monetary-policy panel abandoned the limit in response to rising inflation and ahead of the ECB scaling down its own unconventional stimulus. As Bloomberg notes, the Czech decision highlights a diverging approach to resurgent inflation in central Europe’s economies, with Hungary continuing easing without touching its benchmark rate and Poland forecasting stable borrowing costs in the coming quarters. The Czechs originally imposed the cap in 2013 to avert deflation.

According to the latest official data, the central bank bought €47.8 billion ($51.3 billion) in the four years through January to prevent the koruna from gaining beyond the limit. Adjusted for natural inflows seen in the balance of payments, the overall speculative position was about 50 billion euros to 60 billion euros as of March. ING Groep NV puts the intervention volume at about 36 billion euros so far this year.

Ironically, central bankers had cautioned that the accumulated speculative position is so large that investors hoping for a quick payoff from koruna appreciation may struggle to find counterparties for their positions in the currency after the exchange-rate limit is removed. The koruna swung between 26.81 per euro and 27.17 per euro, trading at 26.90 as of 12:36 p.m. in Prague.

Indeed, as shown in the chart below, the initial response to the peg removal has been relatively modest.

Not so much other Czech assets, however, as Czech bonds slumped, with shorter maturities leading declines:

  • 2-year yield +20bps to minus 0.18%, highest in 8 months
  • 10-year yield +8bps to 0.91%

Elsewhere in central Europe, in reaction to the Czech central bank announcement, the Polish zloty gained 0.1% to 4.2282 per euro and Hungarian forint appreciates 0.2% to 309.72/Eur.

Governor Jiri Rusnok said after the March 30 policy meeting that the bank will be ready to mitigate excessive koruna swings after the exit. But he also said earlier in March that policy makers won’t be “overly sensitive” to initial swings, which could be in either direction, and will let the market find a new equilibrium.

After the initial calm, we expect the EURCZK to drift steadily lower as market forces normalize.

In the aftermath of the announcement, Nomura said it sees the Czech central bank intervening only if EUR/CZK gets well below 25, or on the upside if going over 27.5. He added that the central bank is looking for a monetary tightening and wants a currency rally, and “if not, they will have to start hiking rates later in the year."

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Croesus's picture

Ctrl+P, mofos.

Straight from the Banksters SOP Manual©, Chapter 5, "FTW"

Darktarra's picture

Times they are a changin'!  Get ready, get set, get broke! 

Notayesmanseconomics's picture

If you look at the labour market the policy had to go and even the central planners have finally admitted it.

The general unemployment rate of the aged 15 – 64 years , seasonally adjusted, reached 3.5% in February 2017 and decreased by 0.8 p.p., year-on-year......

The median wage, i.e. the wage of a middle employee determined from a mathematical-statistical model of the wage distribution, increased even more markedly by 6.0%.

Meanwhile though from the reaction of the Koruna it looks as though the Czech National Bank is still intervening...

Ghordius's picture

and this is another european currency that had the opportunity to use an european "anchor" while times were rough, out there on the monetary seas

and that anchor was, of course, the EUR

"it can't work". <-- this was said... 60 years ago about the EU. a dozen years later, the same people that said that.... asked to join, and now, 43 years later they are leaving, but if you read from them...

... they are still saying that, for both clubs

NoDebt's picture

Come swim with the Euro anchor hung around your neck.  Stupidest currency experiment EVAH!


Ghordius's picture

well done. you just stated a matter of... faith like... a matter of faith

and you know why I can tell that? because.... there is no "because..."

it's just that. "can't work", "stupid experiment"

meanwhile, your "swim with the eur anchor..." - well, that's what the article is about. why did they do that? is it relevant, all this asking of why... if it's all about faith?

I woke up's picture

WTF are you trying to say?

Inzidious's picture

Dude. What's up with you lately? I've often seen informative, thoughtful posts from you, which is impressive because I often disagree with you but still appreciate the points you make.

Lately tho? I don't really understand...

Ghordius's picture

thanks for pointing that out


Bill of Rights's picture

You're a fucken know this right?

Arnold's picture

Floating Coronas sounds good to me.
Need lime and beach though.

HailTheAlienMasters's picture

it was news well know up front, just the date wasn't declared, I converted as much euros to czk as I could. still the movement is just a couple of %. 

CZ is doing better than almost any country in EU, very a very small national debt, and even odd year doing actually a budget surplus. One of the reason - having its own currency and a rather frugal attitude. 

Johnny_is_already_taken's picture

The reason is mostly because they are located on the bullseye center of europe

They have university graduated, doctorate people that still agree to work for 300 euros a month and

germany has elected them as the dump bin of their heavy industry

And yes... having their own currency helps a bit too

Ghordius's picture

having the own currency... while it is pegged to another currency... 

Raul44's picture

I can assure you though, having own currency is not that reason. There are at least 2+ other countries in EU within same Eastern/Central block doing just as well, if not better and they do have Euro.

Maestro Maestro's picture

**Since neither the Americans, the Russians nor the Europeans (in the EU) can even issue their own (national) currencies; none of you are sovereign countries, that is, free peoples. The Czechs are no different as they settle their international transactions in dollars and euros and keep their monetary reserves in same. In other words, the koruna is just another name for dollars and euros.

You are all the bankers' witting slaves. The manipulation of gold's price lower is the principal method used by the bankers to hide this fact in plain sight. If gold is not money (alongside whatever else) than you are a slave, period. Read on.**

Worse than the bankers rigging gold and silver prices and not having the gold that they sold you (or selling gold that they don't have via fraudulent COMEX Futures contracts) is the fact that we don't even have MONEY today.  Therefore all financial transactions and economic numbers predicated on the existence of money are FRAUD and FORGERIES presently.

Electronic digits and paper fiat currencies in use today are NOT money, according to the law of the country that issues the reserve currency of the world, the US Dollar (Article 1, Section 10 of the US Constitution); or by the tenets of the science of Economics (i.e., fiat currencies are not money because they are not a store of value nor a unit of account due to the fact that NOT ONE fiat currency's value is actually determined or stipulated in concrete legal terms).  Dollars and Euros and Yens are not even lawfully DEFINED as to what they all are exactly; what their economic worth and transactional value is. Hence, fiat currencies simply cannot constitute the legal foundation of any lawful contract!

(Also, there cannot be either inflation nor deflation in the ABSENCE of money.  Both inflation and deflation are monetary events which cannot take place where there literally is no money.)

What we have today is massive GLOBAL FRAUD mascarading as a monetary system based on the (fraudulent) US dollar because all fiat currencies are basically only a derivative of the US dollar, including the Euro, the Yen, the Yuan, the Rouble, the Shekel and the Riyal.


Why do a few people get the right to print fake fiat money out of nothing and buy your goods and  services with it whereas you have to WORK to obtain the same worthless money created out of nothing?

THAT is the question at the heart of the matter.  That the bankers manipulate interest rates or the price of gold via fraudulent Futures trading (by selling gold that they don't have) with fiat money is a moot point.

To put it differently: why do the bankers get to have anything that they want without working for it and you, you don't?

All this talk about market rigging, monetary theory and fraudulent (paper) gold trading is a cover-up for INJUSTICE.

The US Constitution FORBIDS the use of debt as money; the US Constitution proscribes (debt) notes which is what the US dollar is presently.  Think, all other currencies are just another name for the US Dollar.

What passes for money today is a CRIME, no more no less.


You are all aiding and abetting this crime every time you buy, sell, pay or get paid.

And then you ask, Why our leaders, the politicians, the bankers, and our military men and women are EVIL?

The answer is, because they are just like YOU. They are your sons and daughters.

The Gladiator's picture

"Since neither the Americans, the Russians nor the Europeans (in the EU) can even issue their own (national) currencies; none of you are sovereign countries, that is, free peoples."

  I'm just curious. Do you live where this isn't the norm? If so,what country do you reside? I may want to become your neighbor. (not sarc/)

Maestro Maestro's picture

The problem is, the West pretend to be liberal democracies with free markets blessed with great human rights records: a hypocrisy which does not necessarily exist elsewhere?

Thanks for the inquiry.

shizzledizzle's picture

Well bless their hearts.

strangeglove's picture

Drivin my Skoda high on Cocaine!

TeethVillage88s's picture

But look:

- If we check the charts for CHF & CZK they probably have been trading within a stable range with no huge spike
- you looking at .11 cents for CHZ or maybe .17 cents
- Check the action on the Sheckel... Crickets
- Sheckel dropped like .40 cents .50 cents

So okay yeah it is about controling the price as billions are trading.

- So it is about Assets, Equities, Currency Reserves, Linking to another Currency or Gold...
- Last year they bought $46 Billion or something
- the intervention volume at about 36 billion euros so far this year.

peterk's picture

Everyone in CHEKOSLAVKIA just got wealthier...  with the  CZK moving up.

Yet the reserve bank want the  urrency lower to impoverish the  citizens.


amazing how  stupid people carry on stupid policies and no one says anything about it or challenges them

Ghordius's picture

thank you for posting the link about this scandal about meat entering the EU

as a reminder, it's local veterinaries that check food safety. local = national = from where people eat the stuff

meanwhile, I am of the opinion that food... should never cross oceans. imho, food should be grown as locally as possible

enter reality: most european countries do not stretch over enough space to have all kind of foods

but the EU does, with a few exceptions that can still be imported. hence my request: the EU to became more protectionistic about food

and who hates this request? well, most Britons, "free traders", the US AgriBiz lobby, etc. etc.

The Gladiator's picture

Why does everything monetary over there sound like the name of a planet in the Calvin and Hobbes comic strip?

LoveTruth's picture

Introduce the gold standard and you will have stability and growth.