The Czech koruna could be just weeks away from relinquishing its title as the world’s most boring currency.
This title is no accident. In late 2013, the country’s central bank took drastic action, setting an upper limit on the currency as a way to deflect deflationary pressures. With benchmark interest rates at the time a whisker above zero per cent, and with no desire to take rates into negative territory, this was really the central bank’s only option.
Its line in the sand is 27. The central bank will not allow the euro to trade below that point against the koruna — and duly it hasn’t. The exchange rate has flatlined, edging slightly closer to the limit of late. The koruna has almost always been a slow-and-steady currency, but this really has taken the tedium to a new level.
The central bank has succeeded in this largely because of its clear and credible message. Simply warning off the speculators has worked wonders. It has put its money where its mouth is too, though, with reserves doubling to around €70bn since late 2013.
However, the trauma of the Swiss decision to scrap its currency floor in 2015 has left traders wondering when the Czechs will fold, although any broader impact would clearly pale in comparison to the Swiss stink bomb.
That time may be approaching. The Czech central bank has committed itself to keeping the floor at least until 2017, but that’s not too far away. Earlier this month, it gave a presentation on the matter, noting that it’s “likely” to keep the limit until the middle of next year, and outlining its plans for an orderly removal of the policy. It will, we’re warned, be “clean” and “one-off” but transparent, and will leave the central bank free to intervene here and there to smooth out any shocks.
HSBC has already dubbed the policy shift “Czexit” (sigh) and warned that, in theory, it could happen as soon as January — particularly as inflation has been showing signs of life. The forwards market does not exactly smell blood, but it does suggest traders are preparing for a break.
The central bank has a rates decision coming up on Thursday. You needn’t set your alarm for that one. But it would be unwise to take your eye off this arcane pocket of the currency markets indefinitely.