BUDAPEST: Czech crown forward prices extended gains on Wednesday as investors bet on a surge in the crown once the central bank exits from its cap.
Central European assets mostly firmed mildly or were treading water in slow trade, buoyed by the region's healthy economic fundamentals, while global markets were lukewarm.
Even though Czech interest rates are well below levels elsewhere in the region, strong demand for the crown has forced the Czech central bank to buy billions of euros in the past months to keep the crown on the weaker side of 27 per euro.
It imposed the cap in 2013 to fight a deflation threat.
The Czech economy has rebounded since then and investor speculation has grown over how soon the bank may let the crown float freely and how much it could strengthen.
Vice-Governor Mojmir Hampl reiterated on Tuesday that the exit would definitely not happen before the second quarter of 2017.
Vladimir Tomsik, another vice-governor, said on Wednesday that the cap policy was likely to end in mid-2017 and in a transparent way, in a single move.
The crown exchange rate implied in six-month forwards jumped to a five-week high in overnight trade. It firmed further after Tomsik's comments, to 26.82 per euro by 0849 GMT.
Traders said gains continued from last week, when Governor Jiri Rusnok signalled the central bank would not get nervous if the currency firms by single percentage points after the exit.
"There was a big difference in what the market had been pricing before and what Rusnok said," a rates trader said.
A Reuters poll earlier this month showed that analysts were split over the likely timing of the exit from the cap and a small majority of them expected it to happen in the next 12 months.
Raiffeisen analyst Daniela Milucka said Czech inflation could rise very close to the central bank's (CNB) 2 percent target next year, but loose monetary policy in the euro zone would make the bank keep its own weak currency policy.
"The ECB will likely extend its quantitative easing program beyond March 2017. Thus we project the CNB will abandon the FX commitment in the second half 2017," she said in a note.
Regional currencies mostly firmed, including the leu which gained 0.1 percent to 4.498 after parliament passed a bill on Tuesday on the conversion on Swiss franc mortgages, removing a key risk factor.
"...amid elevated risks for fiscal slippages (around Romania's December elections), we continue to see near-term pressures on EUR/RON tilted to the upside," ING analysts said in a note.
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