Long crown positions cast shadow over Czech market

The Czech crown's release from an intervention regime last Thursday did not produce the fireworks seen at the end of the Swiss franc peg, but a pile of long crown positions held by investors means a show may yet take place.

The crown traded at 26.63 on Wednesday -- 1.4 percent stronger that the 27 level the central bank held for over three years. It was a far cry from the jump some investors had hoped for when they prepared for the cap to be dropped.

So the majority of positions waiting for greater strength -- between 20 and 60 billion euros worth, analysts reckon -- are still in place.

The market view is that the crown's fundamental value is a few percent stronger that the current level, but the amount of crowns still around, after the bank bought more than 70 billion euros in interventions, stands in the way.

"The potential for any bigger firming is mitigated by these positions. If people close them, it can run higher," ING chief economist Jakub Seidler said. "I don't think any significant part has flown out so far."

Forward rates indicate only modest crown gains ahead. The three-month outright forward, pricing where the market believes the currency will move, traded at 26.54 on Tuesday. A one-year forward was at 26.48.

Trading volumes on the interbank market have not been huge, measured by the number of trades on the main euro/crown trading platform, Reuters Matching.

The system recorded 2,437 euro/crown spot trades on Thursday, the second highest daily activity since late 2013. But the number fell back to 476 on Tuesday, not far above 2017's daily average.

"I would not want to be in (the long-crown) people's skin right now. One loses nerve, then a second and a third and there could be quite a mess," one trader in Prague said.

Position closing could move the crown to the weak side of 27 and more if stop-losses are triggered by selling.

WAITING GAME

The central bank has made clear it would not, initially, stand in a way of large swings. In a radio interview, Governor Jiri Rusnok said he would not be bothered by the crown at 24 or 30 per euro.

Weakening could hasten interest rate hikes from the current 0.05 percent, providing a bigger rate differential over the euro zone, which would in turn attract crown buyers. But a firmer currency could push hikes further into 2018.

Claudia Calich, a fund manager at M&G, said she would hold on to her long crown position in part due to uncertainty over the French presidential election on April 23 and May 7, though she was aware of the risk from market positions.

"It's an open economy, but in terms of contagion if you have any large negative shocks for the euro zone, the currency should still outperform the euro," she said.

"The biggest risk to the trade is the very large positioning in the market and what other investors will do now the floor has been removed – for example, if everyone rushes to the door at the same time."

Bryan Carter, head of emerging market fixed income for BNP Paribas Investment Partners, acknowledged the positioning risk, which is why he is limiting his exposure to about 2 percent of his fund.

He takes a longer view, positioning in bonds, which offer higher yields than German bonds. "If you take that 10-year view, we're at a very favourable valuation... So we have an enormous base for the crown to deliver returns," he said.

Part of the positioning is held by companies in the heavily export-focused economy hedging euro revenue. This will not add to crown selling, but their demand will also be slow to return.

The overall economic picture -- unemployment the lowest in the European Union at 3.5 percent under Eurostat methodology and the purchasing manager sentiment near a six-year high -- speak for a firmer currency.

JP Morgan said in a note the crown should firm overall despite the positioning. It expected the crown in a range of 26.00-26.25 by the end of the year. ING sees it at 25.50.

Central bank chief Rusnok said on Tuesday the bank was surprised by the market calm and this did not have to last.

"The amount of crowns bought by market players ... is huge, and it is clear that searching for a longer-term balance will take some time, there can be much bigger swings."

(This article has not been edited by DNA's editorial team and is auto-generated from an agency feed.)