Following the Czech National Bank’s (CNB) announcement of ending interventions to support the koruna, the currency witnessed a dramatic depreciation. Despite maintaining the key interest rate at seven percent during their monetary policy meeting, the formal conclusion of market intervention led to a downward spiral for the koruna.
Almost immediately after the CNB’s statement, the koruna lost 0.83 percent against the euro, reaching CZK 24.156 per euro, an increase of more than 20 cents compared to the previous day, as reported by Patria.cz. Additionally, the koruna experienced a noticeable weakening against the US dollar, declining by 0.75 percent to CZK 22.064/USD.
This sharp decline came in response to the CNB’s declaration that it will no longer intervene in the foreign exchange market to counter the koruna’s depreciation starting from October 2022. The bank formally put an end to the intervention regime initiated in May 2022.
According to a press release from the CNB, their approach under the managed floating exchange rate regime is to always prevent excessive fluctuations in the koruna’s exchange rate that could jeopardize price or financial stability, whenever deemed necessary by the Board.
The aftermath of this decision sparked speculation on the currency’s further depreciation. Pavel Peterka, the chief economist at Roklen, anticipated heightened volatility in currency pairs involving the koruna, attributing it to the forthcoming press conference where Governor Ales Michl would shed light on the reasons behind the decision. He also mentioned the presentation of a new CNB forecast that would aid in estimating the Bank Board’s next steps for the remainder of the year.
With uncertainty gripping the market and increased currency fluctuations on the horizon, Peterka advised traders and investors to brace themselves for the potential opportunities arising from the situation, suggesting that higher volatility might pave the way for advantageous foreign currency purchases.
The stage is set for an engaging financial spectacle, as market participants eagerly await insights from the press conference and prepare for an eventful period of trading on Thursday and beyond, amidst the shifting landscape of the managed floating exchange rate regime.
