U.K.’s flash PMI indices indicate decline in business activity in November, composite index falls to 47.4
Sniffing a peg break Series: Koruna-Euro peg to end this year
Czech National Bank (CNB) chief confirmed the speculation that the Euro-Koruna peg would be abolished by the central bank in 2017. They prefer a time in the middle of the year but haven’t decided yet. CNB instituted the peg (upper limit) back in 2013 at 27 per euro but since then the CNB balance sheet just ballooned from $40 billion to $85 billion as of now. Forex reserve is currently just below 50 percent of Czech GDP.
Over the past few years, the Czech economy outperformed those that in the Eurozone, adding pressure to the peg. Still, the central bank insisted on maintaining the peg as the single currency area remains the biggest destination for Czech exports. But as the inflation rises and the recent data showed an increase 1.9 percent in 2016, Czech central bank faced the dilemma of either to hike and reign on inflation or to maintain the peg and let inflation run higher.
With the central bank confirming the end of the peg, the speculative downside pressure on EUR/CZK is expected to rise. The current interest rate maintained by the CNB is 0.05 percent, whereas ECB is holding rates at -0.4 percent. So with a faster rate hike expected from CNB, EUR/ZK has a lot of downside potential. CZK is currently trading at 27.02 per euro