BUDAPEST: The Czech crown extended gains on Friday in the second session since the removal of a central bank (CNB)cap that had kept the currency weaker than 27 against the euro since late 2013.
The move itself and a rise in volatility was not a surprise.
The CNB's commitment to maintain the cap ended last Friday given that higher inflation no longer necessitated a weak crown, and the bank probably did not want to buy more euros in defence of the cap, after tripling its reserves since 2013.
The surprise was that the crown's swings remained moderate.
It has seesawed between 27.252 and 26.557 against the euro, even though some analysts expected bigger moves beyond 26 and 28.
After an early weakening, the crown firmed 0.1 percent to 26.635 by 0922 GMT, in line with Hungary's forint, while the Polish zloty firmed more, by 0.3 percent.
Analysts said the crown could remain volatile in the coming weeks or months as many investors may want to take profits on long crown positions, while hope for further gains keeps buyers in the play.
"Whereas we would project volatile movements and no linear appreciation trend throughout Q2 and Q3, the overall trend until year-end should bring appreciation of CZK toward 26 against the euro," Raiffeisen analyst Wolfgang Ernst said in a note.
The CNB has pledged to smooth volatility.
Its reserves have swollen to 122.62 billion euros, keeping abundant gunpowder to prevent a crown fall, and it could also lift its record low interest rates if needed.
The CNB's tool to fight an excessive firming could be resuming crown selling in the market.
Market participants have said volatility may rise, but the bank is unlikely to step in unless the crown leaves the 25-28 or even 25-29 range.
"We assume that the CNB will not react to exchange rate
appreciation to EUR-CZK 25," Societe Generale analysts said in a note. "However, the CNB would probably react should EUR-CZK hit 28, as currency depreciation may jeopardise achieving the inflation target."
The Czechs will release key March inflation figures on Monday which will test if inflation, which ran at 2.5 percent in February, can stay close to the bank's 2 percent target.
Polish flash data have showed that inflation may be retreating in the region after a surge in the past months.
Czech government bond yields continued to rise, trading at their highest levels for months or even years.
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