Ongoing Interventions of Czech National Bank Causing Pressure on Market

Following its 2013 decision, the Czech National Bank (CNB) has been continuing in its efforts to intervene against appreciation of the national currency (CZK). While the precise costs of interventions remain unknown, market estimate of CNB involvement to keep the Czech currency weak by purchasing foreign currencies is as high as CZK 180bn (year to date).

The CNB efforts have been noticed by some international speculators mainly from the United Kingdom which expect that a scenario similar to the surprising intervention exit of the Swiss National Bank might be repeated by the CNB, thus resulting in sudden appreciation of the CZK up to 10-15%.

The additional influx of CZK from speculators turned the Czech currency market upside down and made the CNB further increase its exposure.

Meanwhile the Czech Finance Ministry rejoices over negative interest rates of bonds denominated in CZK. Obviously, foreign investors are virtually eager to pay the Czech Republic to be able to lend it money. The intent is of course to reap a considerable profit once the CNB interventions are over. Managers of pension funds, however, are remarkably less enthusiastic as the market conditions make it difficult to achieve any profit for their clients at all.

In any case, the CNB still insists on making a gradual intervention exit not before mid-2016. This clearly stated approach of the Central Bank is considered by many importers and exporters as the safest and cheapest way of currency hedging.

Martin Holler