With the Czech Republic's 3-1/2-year old currency cap expected to be removed within months, 'fair value' calculations suggest the crown will not rise much more than 5 percent against the euro.
Crown moves are unlikely to be anything like the Swiss franc's dramatic surge in 2015 when its euro cap was scrapped without warning. On forward markets, where traders position for currency moves, the crown has risen in recent months, with three-month contracts on Tuesday indicating the crown at its strongest level since 2013.
Implied three- and six-month forward rates are around 26.7 to 26.88 per euro - not far off the 27-per-euro cap.
And a Reuters poll found median forecasts for the crown at 26.4 per euro a month after the exit, while the median forecast for the strongest point within six months of the exit was 25.60.
"We expect the crown to appreciate around 2.6 percent to 26.5 per euro," said Erste Bank's Head of CEE Macro research Juraj Kotian, who like most analysts predicts the 27 per euro cap will be lifted next month.
"It could get a little stronger for a while, but we think the central bank will be resistant to it appreciating past 26."
That view of potential "post-cap" gains is supported by textbook valuation methods used by organisations such as the International Monetary Fund (IMF).
A common approach is to calculate the 'real effective exchange rate' (REER) by taking the weighted average of a currency against a basket of trade partners' currencies and then adjusting for inflation.
The crown's REER is roughly 5 percent below its 10-year average, which if it reverted would be the kind of rise J. P Morgan sees as a maximum. Commerzbank predicts a rise to 26 immediately after the cap is scrapped, then to 25 by year-end, effectively an 8 percent jump, while Oxford Economics sees the crown around 2 percent undervalued based on REER, and settling around 26.4 per euro.
Czech authorities have played down likely moves, with central bank board member Vojtech Benda describing the crown as being at "the weaker edge of its equilibrium range", with the possibility of 1-2 percent appreciation trend in REER terms.
He told investors in January that scrapping the cap would "not result in exchange rate appreciating sharply to slightly overvalued levels recorded before the CNB started intervening (in 2013)."
One argument for a crown jump has been record buying of Czech bonds by foreigners.
Interventions to maintain the cap have caused central bank reserves to balloon to some 60 percent of Czech gross domestic product: http://reut.rs/2npcAd8
But much of that money may move once it enjoys the currency appreciation boost because the crown lacks the Swiss franc's international cachet and demand is naturally lower.
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