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Careful planning minimises Czech bounce

The Czech National Bank can teach the world’s heavy-hitting central banks a thing or two, it seems.

On Thursday, it took the dramatic step of scrapping the upper limit on its currency, the koruna, in a step dubbed by portmanteau addicts as Czexit.

Europe’s recent history of this kind of thing has been pretty brutal. Ask any trader, any investor, and you can be sure they will be able to tell you where they were when the Swiss National Bank pulled the plug on its currency limit back in 2015.

Likewise, seasoned traders who made it through 2008 still shudder at the thought of that dark day when the euro sank by around 30 per cent in seconds against the rocketing franc.

Now, the Swiss franc is a much bigger currency than the koruna, with much greater capacity for unsettling global markets, as we saw on that eventful January day. Still, the scale of the koruna’s rally has been impressively limited. The euro “collapsed” against the koruna by all of, well, 1.7 per cent. Jaws dropped by a similar degree. Analysts and investors broadly agree this is because the Czech central bank has played its hand well.

Unlike the Swiss, the Czechs prepared the groundwork, guiding that the break would come around the middle of the year but (hint) not before the end of the first quarter. Lessons learned, perhaps.

The snap in the limit was a surprise, a big moment for a small currency, one that followed some serious heavy lifting by the central bank to absorb huge speculative inflows. But it was not a career-ending moment for anyone. That helps to give confidence that the central bank can still be taken at its word.

So, even though there is good reason to get into the koruna — rising inflation pointing to a potentially rapid rise in interest rates, decent growth and the lowest unemployment in the EU — speculators are likely to believe the central bank when it says it won’t let the currency shoot to the moon before it fires back.

Speculators can be expected to try to see how far they can push the central bank from here. But so far, policymakers have spoken quietly while holding a big stick.

katie.martin@ft.com