The Czech koruna continues to outperform rest of the region after Bernanke’s speech in Jackson Hole. The EUR/CZK pair has touched two-week low near 24.05 and the PLN/CZK cross is below 5.80 and slowly approaches all time lows.
The success of the Czech koruna relies mainly on recent upgrade of the Czech rating and speculations of some London-based hedge funds that the Czech currency could play the role similar to the Swiss frank. We reiterate that this is not a realistic assumption. The Czech economy in contrast with the Swiss one has a much smaller and less developed financial sector. Furthermore, its lowinflation history is significantly shorter and the Czech economy has current account deficits financed partly by the inflow from EU funds (in contrast Switzerland runs current account surpluses around 10% of GDP). Last but not least the Czech economy is much more cyclical and usually hard hit during global downturns. That is why it can hardly be considered safe heaven during the periods of global fear. On the other hand it’s low-inflationary and low-rates status can make it suitable funding currency for carry trades but only during the periods of global optimism.
Putting it all together, although the very short term sentiment can remain positive and EUR/CZK may test 24.00/23.92, we foresee a pause at these levels. Similarly we would bet against the Czech currency on the pair with Polish zloty as it approaches the all time lows at 5.71 PLN/CZK.