CNB's (Czech National Bank) latest board minutes confirm that the CB has actively been debating negative interest rates.

The bulk of board members still ponder that there is no need for this tool and that it could challenge financial stability.

They still favour a passive approach of just extending the FX cap further. But a significant minority strongly counters that it would help curb appreciation pressure on the koruna.

Anyway, such signals are consistent with our forecast changes last week:

True, the minutes are not telling us that interest rates will be negative soon, but the argument is developing gradually - a few months ago, there would not have been much of a debate.

Technically, as you can probably make out the strong signals of bearish trend which has just begun, it may holding stiff at 21EMAs. Daily leading oscillators have approached oversold zones and sending some oversold signals. These buying pressure would not be deemed as continued uptrend.

Formulation of USDCZK hedging strategy:

Since the a negative benchmark rate (at -0.15%) is forecasted in the Czech Republic, and as a result USDCZK's abrupt upswings should not hurt ongoing bearish sentiments.

Therefore, bear put spread shall be used over protective put as the abrupt upswings may make premiums on naked puts prove to be too costlier.

Bear Put Spread = Long 1M ITM -0.5 delta Put (1%) + Short another 1W (1%) OTM Put with net delta should be at -0.40.

For a net debit bear put spread reduces the cost of hedge by the premium collected (¥6405.56 on the shorts of OTM put) and keeps hedger to participate on upward moves but it comes at the expense of Partial hedge rather than a complete hedge.