Crown strengthening but no immediate boon for consumers

The Czech crown this week reached its strongest level to the euro since before the Czech Central Bank launched its intervention regime in 2013, when it climbed to on Wednesday. I discussed the current development – and the future outlook for the crown – with Patria Finance’s chief economist, Jan Bureš.

Jan Bureš|Photo: Tomáš Adamec, Czech Radio

“The main reason behind the strengthening of the Koruna is the growing bets on increase in interest rates in the Czech Republic, which makes the Koruna more attractive, especially in relative terms towards the Euro.

“In the Eurozone, just the opposite thing is happening. The market players just now don’t believe that in a foreseeable future the European Central Bank is about to rise the interest rates.

“So the relative attractiveness is based on interest trade differentials and that’s why there is additional speculative capital flowing into the Czech economy.”

How much further do you think this strengthening can go?

“It’s very difficult to say exactly where the Koruna could end up in three month’s horizon. I think we can get as far as 25.50 or 25.20. I can imagine these levels.

“On the other hand I think there is a serious risk for the Koruna. If the foreign players, who are now heavily betting on further Koruna gains, decide at one point in the future that they want to leave the Czech financial system, the Koruna can easily get under pressure.

“So in the short run, I think, the Koruna can extend its gains, but in a longer run, at one point, we can face a pretty solid sell-off on the Czech foreign exchange market.

“It will very much depend on the mood, on the sentiment on the global market. That is something crucial for the foreign players, who are now betting on the stronger Koruna. When this sentiment changes, I think the sentiment on the Czech koruna can change pretty quickly as well.”

How soon do you expect consumers to feel the benefit of the strong crown?

Photo: Jaroslava Mannová

“Traditionally I think in one to three months you feel that there is certain impact from strengthening currency on domestic consumer goods, especially on electronics traded with Asian countries and the US.

“For now, I think, the situation is a bit different, as the Czech economy is overheating. There are strong wage pressures and a very solid domestic demand.

“As a result the companies on the market are not under pressure to reduce the prices. They can keep the prices at current levels and have slightly higher margins, because the domestic demand is pretty strong and they don’t have to compete so much for the customers.”