x Abu Dhabi, UAEFriday 21 July 2017

Czech threat to weaken currency creates a stir

What's Down: The Czech central bank's threat to weaken the koruna by intervening in foreign-exchange markets for the first time since 2002 is increasingly being seen as credible.

The Czech central bank's threat to weaken the koruna by intervening in foreign-exchange markets for the first time since 2002 is increasingly being seen as credible by the world's biggest currency trading companies.

Both Bank of America and Morgan Stanley say they expect the Czech currency to drop to a three-year low this year. RBC Capital Markets and Danske Bank also say betting on the koruna sliding against the Russian ruble is among their favourite trades.

The Czech National Bank governor Miroslav Singer is moving to join counterparts in countries such as Switzerland to use the exchange rate to stimulate growth after cutting interest rates to about zero failed to give the economy a boost.

The koruna rallied 2 per cent against the euro in 2012, lagging behind the 9.4 per cent gain in Poland's zloty and the 8.1 per cent advance by the Hungary's forint.

"The economy needs more support from monetary policy and the currency channel is likely the most effective" path, said Mai Doan, a London-based economist at Bank of America, the most accurate forecaster of emerging Europe currencies based on data compiled by Bloomberg. "The economy is weak, yields low, and the case to buy Czech assets limited."

The Czech Republic is in its second recession since 2009 as the sovereign-debt crisis sweeps the 17-nation euro zone - the country's main trading partner. At the same time, domestic austerity measures have sapped domestic demand.

Further policy easing "could be achieved by influencing the exchange rate," the central bank said on Monday.

It has kept the benchmark rate at 0.05 per cent. That is the European Union's lowest after Denmark, which has a deposit rate of minus 0.2 per cent.

The koruna has already retreated 2.9 per cent against the euro since September 17, a day before Mr Singer signalled the possibility of currency sales.

 

* Bloomberg News