I write this Forex market analysis article primarly for my fellow FX online traders here at forexmosphere because I come from the Czech republic and so I think I have some information to share which foremost, could help in trading EUR/CZK after the peg will be left. For a more speculative minded trading audience though, please send me a personal message and then I can go deeper into the real reason when the intervention will end. Most journalists would say it is polliticaly incorect and well it is really, so if you are one of those people who like kissing the world's ass, please don't write to me because you may not like some of the answers.
Some very brief facts
Why: Interest rates were on technical zero and deflation was ahead.
Goal: To avoid deflation and get as close as possible to 2% inflation rate.
How: Hold currency rate above 27 (floor) Czech Crowns for 1 Euro.
Started: 7th November 2013
Planned end: Second half of 2017 (already postponed in 2016).
Unexpected end possible: Due to decision that CNB (czech national bank) can meet their inflation goals (but not necessary 2%, it is just upon them when they will decide).
Czech inflation expectations - current situation
The current inflation rate is 1.5% and is heading to desired 2%. No wonder this attracts more and more speculators and the CNB has to buy more and more Euros almost every month to be able to hold the rate above 27. This speculative pressure has weakend because the end was said to be postponed to the second half of 2017, but... a week ago the govt started an EET (electronical evidence of revenues) in which every service provider is obligated to issue all invoices through this system (such collected invoices are aggregated in a central system, paired together and tax avoiders are found...) This has brought additional costs to all service providers in Czech, this logically implies an increase in the price of their services. And so the price level will rise abruptly. Therefore the conclusion of the current situation -> 2% inflation rate is nearer than most of the people think.
The intrinsic value of EUR/CZK
Taking into consideration two free float Forex currencies from the Middle-European region - PLN and HUF. These FX currency pairs have been weakening against Euro for the past 3 years, more specifically PLN lost ~6.5%, HUF ~5.5% (since 7th November 2013). In comparison with CZK which was weakened by the intervention of about 4.7%. Statement, based on the average loss of the above mentioned currencies - PLN, HUF, says if there were no interventions (and czech economy is perfectly comparable with the Hungarian and the Polish economies) then the intrinsic value is somewhere around ~27.4 CZK for 1 EUR.
The peg speculators and how to make their money yours (in the future)
The answer lies in the Czech 3-Year Bond Yields. The current yield is -0.596% which means the investors pay this amount so that they can lend money to the country. (Needless to say CZE govt is taking advantage of this opportunity and even with expenditure surplus they planned a deficit 70B CZK for next year) And so why does this happen? Is the Czech economy in such a great condition and so trustworthy? Even better than Austria, Poland, Hungary, Denmark etc..? No, definitely not, the only cause of such so low yields is caused by foreign investors buying those bonds in a hope to gain more than they paid to govt. And the gain is most probably around approx 5%. However, after the maturity day of those bonds (which differs ofc), which have been accumulating since August 2014 (my guess), there will be a lot higher supply of CZK which will cause its weakening again and based on the intrinsic value derived in previous paragraph, it could be a nice run back after the peg-leaving drop.
Conclusion
Please feel free to ask anything you want to know about this Forex Market Analysis and I also hope you enjoyed this article because it was my first fx blog of this kind. To be honest I don't really like making such long-term unpredictable views but if the peg will be left until the second half of 2017, then CZK supply will increase because of the reasons previously described here, so I will not hesitate to buy new highs for the EUR/CZK curreny pair.
Comments
Hi Daniel, informative post and an interesting read thanks for sharing. Holmes
I am very glad you like it and also hope it has brought some new light at this problematic. :]
The inflation is 2.5% already, which is .5% higher than the intervention target.
IMO the central bankers have no idea on how to end this without loosing the credibility and to avoid any longer-term exchange rate instability. So will be interesting to watch.
Just to let you know, there is CNB Bank Board members at the monetary policy meeting taking place on this thursday (30th March 2017). Where all seven members will attend and it is probable they will leave the peg! (otherwise the next official meeting which will be considering this will be next month again). It can also cause some turbulences elsewhere surely, like USDCZK etc so be careful trading in this madness environment.
So the Czech National Bank left the hard peg today and left doors open to soft peg, which will protect the Czech Crown from big volatility.
Nice break out Trades Daniel, the first is a symm tri plus MC
NSC break, entry M5 MC
Looks great! Unfortunately for me my broker does not provide trading the CZK pairs because of the peg... :/