20170330-法国巴黎银行-EURCZK__Are_you_rushing_or_dragging__13页_671kb

EURCZK: Are You Rushing or Dragging? - Summary

Core Content and Key Insights

This report by BNP Paribas London Branch analyzes the potential impact of the removal of the EURCZK floor on the Czech koruna (CZK) and its interest rate differential to the euro (EUR). The main focus is on the market positioning and the CNB's balance sheet, with the aim of forecasting the likely path of EURCZK and the appropriate interest rate strategy.

Main Findings

1. EURCZK Appreciation Potential

   • The removal of the EURCZK floor may lead to a temporary appreciation of the CZK above 27 due to over-positioning in short EURCZK.
   • This is expected to be a one-off spike, not a sustained trend, as the CNB is likely to use its accumulated FX reserves to stabilize the currency if it appreciates.

2. Front-End Czech Rates are Not a Pay Trade

   • Contrary to the consensus view, the CNB is unlikely to raise interest rates in response to initial inflationary pressures from a potential CZK appreciation.
   • The market's expectation of rate hikes is based on a misunderstanding of inflation dynamics and the difference between flow and stock concepts.

3. Long-Term Depreciation Outlook

   • In the medium term, EURCZK is expected to depreciate gradually as the positive CA and KA flows rebalance.
   • The Czech economy is generating more savings than investment, which suggests a long-term depreciation path for the CZK.

4. Market Positioning and FX Instability

   • A large amount of short EURCZK positions has been accumulated, particularly by investors and local exporters, which could lead to FX instability following the floor removal.
   • These positions are concentrated at the same level (27), increasing the risk of a cascade of stop losses if the currency appreciates.

5. Interest Rate Differentials

   • The current interest rate differential between EUR and CZK is skewed, reflecting concerns over the accumulated short positions.
   • The CNB is expected to maintain Czech rates close to EUR rates to avoid unnecessary sterilisation costs and to manage FX flows effectively.

Key Information

• Trade Recommendation: Receive 5k 1y1y CZK (3m fixing) at 50, targeting 20 (5bp positive carry per 3m).
• Balance of Payments Analysis:
  • Since 2009, the Czech Republic has maintained a surplus in CA and KA, indicating a long-term depreciation pressure on the CZK.
  • The surplus has been approximately CZK 117bn, showing that the economy is more self-sufficient than previously thought.
• CNB Balance Sheet:
  • The CNB has accumulated significant FX reserves during the floor regime.
  • These reserves are used to stabilize the currency and offset any short-term appreciation.
• Financial Flows and FX Volatility:
  • Financial flows into the Czech Republic have accelerated due to the anticipation of the floor removal.
  • The 'Other Investment' account has seen a significant increase in liabilities, indicating a shift in market sentiment.

Charts and Visuals

• Chart 1: Illustrates the unstable state of EURCZK after the floor removal, highlighting the potential for a sharp appreciation or depreciation.
• Chart 2: Shows the skewed distribution of interest rate differentials to EUR, indicating the market's concern over accumulated short positions.
• Chart 3: Demonstrates the increasing premium for inflows, even though the Czech Republic does not need them, suggesting a misalignment between financial flows and economic fundamentals.
• Chart 4: Indicates that 1y1y EURCZK has already started to move lower, and the report suggests further depreciation is likely.

Conclusion

The removal of the EURCZK floor is a complex event, and the CNB's clear communication and accumulated FX reserves position it to manage any short-term appreciation. However, the long-term outlook remains one of depreciation due to the surplus in CA and KA. The report advises against expecting rate hikes and instead suggests maintaining a close alignment between Czech and EUR rates to avoid unnecessary costs and manage FX flows effectively.