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‘Unshakeable’: Czech koruna keeps creeping higher

The tiny, once-sleepy Czech koruna is finding new fans in the weeks after it broke higher.

After the central bank freed the currency from its upper limit against the euro to trade under CZK27 for the first time in over three years back in April, the exchange rate now stands at CZK26.43. That’s a small move by most standards, but for this currency, it’s a serious jump.

Citi says positive bets on the currency are proving “unshakeable”, with particular support from so-called ‘real money’ – slow-moving pension funds and other long-term investors. The bank says:

Real money accounts continue to replenish their koruna longs, while leveraged involvement remains very shy. Some CPI divergence between Czech Republic and other major central European economies remains one important catalyst behind the theory of sooner rather than later interest rate hikes by the [central bank]. Strategy remains long the koruna, as we believe real money involvement is poised to be a lot more stable than the one triggered by leveraged accounts before the cap removal.

Rabobank, meanwhile, says the currency is in line to overtake the Polish zloty as the best performing currency from the region this year, with the next action from the central bank due on Thursday.

While the two-week repo rate is set to remain at the record low of 0.05%, the market will looking for the Czech policy makers to confirm that they still intend to start raising interest rates in Q3 as previously indicated due to “slightly inflationary” risks to the new inflation forecast and encouraging prospects for the Czech economy. The market will be particularly sensitive to a fresh set of comments from the CNB after Governor Jiri Rusnok and Deputy Governor Vladimir Tomsik signalled earlier this month that the first hike could be delayed until Q4.

A hike in Q3 could be still on the table. If the overall message on Thursday is sufficiently hawkish, the euro could be testing the psychological level of CZK26.00.