Czech National Bank's lifting of EUR/CZK floor dependent on ECB's QE extension

The Czech National Bank (CNB), which has sold koruna since 2013 to prevent the currency from gaining past 27 per euro in a bid to spur inflation and economic growth, plans to abandon the limit around the middle of next year.

EURCZK forwards have fallen considerably over the past few weeks as markets prepare on the exit from interventions. Investors in currency derivatives stepped up bets on future appreciation, with the 12-month euro-koruna forward contract trading at 26.69 per euro, the strongest in more than a year.

"Speculation that the floor will be lifted is increasing. The koruna will advance to 26.5 per euro by the end of next year," said Nordea Bank in a report.

The CNB kept the benchmark rate unchanged at 0.05 percent at its October meeting and attempted to tame market speculation of a break in the EURCZK floor by shifting its hard commitment by one-quarter to 2Q17. Governor Rusnok did not provide an exact month for when the floor could be exited in the Q&A session following the CNB decision, arguing that such a discussion is pointless at this stage since the CNB has not decided the exact quarter to exit the floor.

The central bank is set to release new economic projection on 3rd November, in which it assumes the ECB will terminate its QE programme at the end of March (with no tapering). Therefore, should the ECB at December’s meeting, extend the QE (which cannot be ruled out), this would mean that the exit may also be postponed towards the end of next year.