CZECH NATIONAL BANK EXCHANGE MARKET INTERVENTION CAUSE AND EFFECTSMAYZUS INVESTMENT COMPANY’s office in Prague has received many calls and emails from its clients, who were asking for the company’s thoughts on the decision of the Czech National Bank regarding exchange market intervention, aimed to keep the national currency’s rate at 27 EUR/CZK.
We have interviewed
Ms. Kristina Leonova, our leading analyst from the Portfolio Investment Department, for further insight on the matter.
Kristina, can you please explain what exchange market intervention means, and why is it now conducted by the CNB?Exchange market intervention means direct actions (purchase or sale of large quantities of the foreign currency) taken by the Central Bank of the country, in order to influence the national currency’s rate and keep it in the required exchange rate corridor.
Exchange market intervention is one of the main monetary tools aimed to improve the state of the economy whilst in crisis, and make the economy more effective.
On November the 7th, 2013, the CNB announced the news about exchange market intervention, aimed to lower the Koruna’s rate against the Euro to the level of 27 EUR/CZK. The last time the CNB intervened the market was 11 years ago.
Acceleration of inflation, which has been constantly decreasing and reached 0.9% in September 2013, is the main goal of the CNB.
What are the consequences of these actions? Who will benefit from them?Acceleration of inflation will lead to growth of prices for food, clothing, shoes, home appliances and gas.
According to Mr. Jan Veleba, the President of the Czech Agrarian Chamber, imported products will be affected first, namely pork, poultry, cheese and potatoes. Moreover, the weak Koruna will increase spending in the agricultural sector, mostly for gas and fodder.
The CNB's actions have already caused scare buying of appliances and electronics by Czechs. The volume of sales in appliances and electronics stores have grown significantly until now. Experts expect prices to grow by 5-10%.
However, the Koruna’s weakness will support exporters by decreasing the currency value of their products, and therefore increasing marketability.
Bear in mind that most of Czech’s exports (over 50%) consist of machines, equipment and transport. Beer, crystal and porcelain are a big part of export as well. These products will gain from the weak Czech Koruna.
What should ordinary people do in this case? How can they save money?The CNB stated that it did not have any time or volume limitations for national currency sales, which made it clear that actions aimed to weaken Koruna would be conducted until strong signals regarding the economy’s recovery are received.
It is quite possible that the Koruna will keep losing its positions against the major world currencies. Experts recommend to diversify savings, i.e. keep money not only in form of CZK, but also in Euros or US Dollars.
Exchange market interventions can be considered an opportunity? An opportunity to gain profits?The CNB’s actions aimed to stabilize the EUR/CZK rate at the level of 27 Koruna’s/Euro. Remember there were similar steps taken by the Swiss National Bank, which set up the target for the Frank at 1.20 per Euro, and created a “trading idea” for currency speculators.
Traders can open both long (expecting further weakening of the Koruna, and assuming that the CNB won’t let EUR/CZK go under 27 Korunas/Euro), and short positions. No growth can happen without special stops, or ‘technical corrections’. Quotations roll down during these corrections, and they can be used to open “shorts” and gain profits due to the currency’s weakening.
Moreover, EUR/CZK’s dynamics will be affected by macroeconomic stats published in the Czech Republic. Traders should pay attention to information about GDP, industrial manufacturing, retail sales, income and spending of Czechs, and the level of consumer inflation.
Strong data about the Czech economy will support the national currency and could lead to short-term improvement of Koruna’s positions against the Euro.
Forex allows traders to make profit, not only when the currency grows, but also when it gets weaker.
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Kristina Leonova: Senior Analyst in Investment Research Department
