After strong 2008 shine fades from Czech crown

The Czech currency is losing its muster. The crown, one of the world’s fastest appreciating currencies in 2008, is now rapidly weakening. It has sunk to its lowest point since November 2007, trading on Thursday at over 27 crowns to the euro and just over 20 crowns to the dollar. Chief financial markets analyst of ČSOB bank Jan Čermák explains what is happening to the Czech crown.

Czech National Bank
“We generally see a number of reasons why the Czech crown is weakening. One of them could be a high risk aversion in global economy which weakens emerging markets and their currencies. Another reason might be that investors now see the Polish zloty, the Czech crown and other eastern European currencies in general as overvalued against other currencies within the emerging markets universe. And last but not least, it is caused by the aggressive monetary easing by the Czech central bank which is expected to continue and this makes the Czech crown less attractive against other currencies.”

Has the rate to do anything with the Czech economy slowing down due to the world-wide financial and economic crisis?

“Fundamentals are definitely behind it, but you know, investors are looking at currencies from a point of view of portfolios, so if the economy weakens, it would imply lower interest rates and it makes the currency less attractive. A weaker Czech economy implies lower interest rates and also weaker Czech crown.”

When the crown was strong a year ago, Czech exporters were complaining that it was hindering their exports. I suppose now the weakening Czech crown should be good for exporters and for the economy?

“It should certainly help, but I think that the exchange rate is not the most important vehicle for the economy – that is the global demand and demand from Western Europe, which is falling rapidly. This is now a stronger factor than the exchange rate. But weaker crown will definitely help for instance tourism and other sectors that are exchange rate sensitive.”

What do you think is the prospect of the Czech crown for the coming weeks and moths?

“I think that in some three-month horizon, the outlook is not very optimistic and we will see the exchange rate will weaker even further. This is because the financial crisis now translates into a real recession, which will not help the currencies from outside the Eurozone and from other emerging markets, so we think the koruna could be even weaker. But in the long run of let’s say one year, we are still very bullish on the Czech crown because we believe that the convergence story will return to the markets and the markets might also start to act on the euro-adoption story in the Czech Republic.”