Česká národní banka

Investors may get burnt on crown bets

By Jan Lopatka, Robert Muller (Reuters 25. 1. 2017)

Investors betting on a jump in the Czech crown after the central bank scraps its cap on the currency this year may get burned as they are holding large long positions in shallow markets, central bank vice-governor Vladimir Tomsik said.

Tomsik told Reuters in an interview that investors have built up tens of billions of euros of long crown positions as the bank intervenes in the market to keep the crown on the weak side of 27 per euro, a level many see as undervalued.

The bank has kept the crown weak since 2013 to help revive inflation, and expects to end the policy around mid-2017. The timing is key for the investors betting on gains afterwards.

"There has been a growth in long positions. We are talking abut tens of billions of euros in total," Tomsik said in an interview cleared for release on Wednesday.

"Comparing these numbers with the size of Czech net exports, it is logical to say the crown market is overbought," he said.

"Those speculating on a sharp firming of the crown following the exit could get badly burnt."

Although the bank thinks the crown could rise mildly in the long term, it is trying to counter the view that it has room to firm up quickly. It says the crown will not return to pre-intervention levels around 25.50-70 because wages and inflation are outpacing the euro zone and the currency had been slightly overvalued in 2013.

Tomsik said investors holding Czech bonds would have to navigate "shallow" bond and FX markets, making it more complicated for them to unwind such trades. Daily euro-crown spot market turnover was $638 million in October, a central bank survey showed.

The bank also plans to return to a managed-float after scrapping the cap, not letting the crown float freely. Tomsik said his view was that the board could internally authorise its traders to use specific volumes to smooth out volatility.

The bank bought 30 billion euros from 2013 to November 2016, the latest full data show.

A jump in inflation to the bank's target of 2.0 percent in December prompted further large inflows in early January, seen by analysts at 7-10 billion euros.

Several analysts have estimated the long crown positions at 20-25 billion euros, and said investors may be forced to hold them for some time after the exit to close them at profit. Tomsik declined to give any concrete estimate of the positions.

Still aiming for mid-2017

The inflows and the inflation jump raised expectations the bank will lift the cap soon after its pledge to keep it in place expires on March 31, a Reuters poll showed.

Tomsik said the bank could move at any time after that, not only at policy meetings held every six weeks. It could change any weekly non-policy meeting into a policy one, he said, and could meet at another time if necessary.

But he said the macroeconomic case still pointed to an exit in mid-2017.

Tomsik said he did not care about current inflation but wanted to see forward inflation safely on the 2 percent target, excluding volatile items such as fuels, food and restaurant prices that boosted inflation in December.

"I would not mind returning to the target from above, but of course within our tolerance band," he said, referring to the bank's +/- 1 percentage point corridor around the target.

Tomsik said that while he would not rule out imposing negative interest rates to ease the process of lifting the currency cap, he did not favour them.

"I don't see a reason for negative rates now, the market has delivered them itself," he said. "Lowering rates at the moment of exit would be contra-indicative when I say at the same time that I want to deliver less relaxed policy."