LONDON, Sept 6 (Reuters) - Positioning for a jump in the Czech crown’s value against the euro will be the trade of 2017, Dutch bank ING told clients on Tuesday, predicting the country would scrap its three-year-old currency peg early next year.
The Czech Republic has kept a lid on the crown since 2013 and intervened with increased regularity over the last year to hold the exchange rate on the weak side of 27 per euro as the country’s economy has thrived.
It has said it expects to remove the cap around the middle of next year, but after a change of guard at the Czech central bank and with increasing wage pressure expected to fire up inflation, traders are looking more closely at the timing of the move.
New central bank governor Jiri Rusnok said on Monday the weak crown policy could end around the middle of 2017 even if inflation is still slightly below the bank’s 2 percent target but is heading higher.
“In our view, short euro/Czech crown will be the trade of 2017,” ING’s chief EMEA FX and interest rate strategist, Petr Krpata, and chief Czech economist, Jakub Seidler, said in a note.
“We opt for an early entry to avoid being late to the party,” they said, adding it made sense for Czech authorities to move sooner than mid-2017 because of the risk that huge speculative positions would build against the floor as the date for scrapping it neared.
Krpata and Seidler said their recommended trade of selling euro/crown via 12-month outright currency forward would yield a 5.17 percent return. While the spot exchange rate is 27.022 per euro, 12-month euro/crown forwards currently trade at 26.89 and ING is targeting the rate to move to 25.50.
The crown’s relative resilience compared to other eastern European currencies during the turmoil following Britain’s Brexit vote showed that the downsides of the trade would likely be limited, ING added.
Currency traders in the region, however, may be wary having been buffeted by recent sudden weakness in the Polish zloty.
It had been heavily tipped to rise but fell as nerves about the country’s credit rating grew and poor investment numbers reopened a debate on Polish interest rate cuts. (Reporting by Marc Jones in London and Jan Lopatka in Prague; editing by John Stonestreet)