Monday, 27 July 2020

Czech crown starts year off near post-intervention record: What's in store for 2020?

Prague Daily Monitor |
13 January 2020

The Czech Crown started the New Year off trying to pop a post-intervention record. Last Wednesday the Euro/Crown pairing almost hit 25.23, which is within a couple of “Halíře” of the post-intervention period maximum value against the Euro; the most popularly followed pairing of the currency.

Is the strengthening of the currency a trend which will take off? Analysts are skeptical.

Tomas Pfeiler from Cyrrus told that “The positive tone has its limits, so I see the room for additional strength as limited.” Pfeiler added that with global economic growth expected to rebound, the differential between the interest rates, or Czech economic growth versus the Euro growth, will be projected to decrease. During the process Pfeiler does not see room for the currency to gain value against the Euro.

The Head Economist for ING Bank Jakub Seidler highlighted the unconventional strengthening of the Crown during several days of heightened international tensions, a time when many investors move money into assets deemed “safe.” Seidler added that he considers the Crown to be undervalued at long-term valuation, but due to the overbought condition of the currency during the intervention period, he expects the currency to remain slightly above the 25 Crowns to the Euro value.

The Head Economist of Raiffeisenbank Helena Horská agrees with the theory. She explained that foreign investors poured a lot of money into the country speculating that when the currency would be let loose from the peg at 27, there currency would strengthen. Although the currency did strengthen, it did not move materially, and thus there are still vast amounts of Czech Crowns left on foreign investor’s balance sheets which will sell into any strength of the currency, capping gains.

As usual these are predictions with great explanations from prudent minds. Yet as one great investor says: “Markets can stay irrational longer than one can stay liquid.” So nobody knows what 2020 will bring. A stronger currency would further increase the standard of living in the country and naturally even start correcting the drastic shortage of labour that business has dealt with in recent years.