Monetary pressure cooker is tensing up

Too many good news are coming from the Czech economy. If the crown was allowed to move freely, it would significantly appreciate today without a doubt. Since the beginning of the year, we have found out already that first time in more than twenty years we have a surplus of the national budget. The unemployment rate is the lowest since the year 2008. The inflation reached the goal of CNB when it jumped to 2 %. And the retail sector is only blooming according to the numbers published today. Those are all news that would appreciate the currency under normal circumstances.

That is a serious warning for CNB that the inflation pressures will grow. However, CNB has already clearly said that until the inflation will be around 2 % it means nothing to them and they won’t react. That way it was trying to get away from speculations that it is going to end the interventions prematurely. But the speculations are growing. It is estimated that CNB gave away over one hundred billion crowns for the interventions since the beginning of this year only. That is an untenable no matter how much they will claim that they can handle it.

E. g. member of the bank board of Czech national bank (CNB) Vojtěch Benda said that the end of the commitment is likely in the middle of the year 2017 and that CNB prefers one shot and transparent ending of the exchange rate commitment and that the ending of the exchange rate commitment won’t lead to sharp appreciation of the crown. According to him, the negative rates are not a preferable variant. Except: I don’t believe it at all. The demand for the crown is growing. That is being proved by today’s auction of one-year bond in which the demand made 32.3 bn. CZK. NO Czech bond has experienced such demand before.

My opinion is that the end of the interventions is quickly coming closer. CNB is going to rack their brains how to sail out of this mess. Let’s remember the Switzerland and what problems the interventions brought to it. The experience from the Switzerland is saying that the franc appreciated against the euro by 29 % the day the interventions were ended. It was very unstable following two weeks and got back to normal only after 9 months. So let’s imagine it in the Czech Republic: if everything went only hypothetically based on the Swiss example (which is obviously very extreme option), the crown would jump under 20.00 CZK/EUR against the euro in one day. Do you think that CNB wouldn’t interfere? It would interfere much sooner for sure. That’s why I don’t believe in one shot releasing of the exchange rate.

 
I think that the exchange rate will end the year significantly stronger. It is only about how long will the CNB last to intervene. Will the intervened trillion of crowns stop it or will two? Trillion is within the reach, and maybe this jackpot has hit already today – but only a couple of people in CNB know that.