1704286996
The year 2023 was like a seesaw for the Czech crown – it experienced both a significant appreciation and a significant weakening against both major world currencies, i.e. against the euro and the dollar.
Economists contacted by SZ Byznys generally agree that the krone performed better than expected last year, especially given the strengthening in the first half of the year, when in April it almost reached the all-time highs of the summer of 2008, So below that was 24 crowns per euro.
All this against the backdrop of ongoing geopolitical risks and the not very positive economic development of the domestic economy.
“From this point of view, the strengthening of the krona has exceeded expectations and the development in the second half of the year can again be viewed as rather positive, as the economic situation for the domestic economy did not bring any positive factors from the krona’s perspective,” assesses Jakub Seidler, chief economist of the Czech Banking Association, the development of the domestic currency.
Over the past year as a whole, the crown reached an average value of around 24 crowns per euro and weakened against the European single currency by more than two percent to the level of 24.70 CZK per euro. Against the US dollar, it ended last year’s trading almost at the same level as at the beginning of the year, namely around 22.35 crowns per dollar.
Photo: Trading View, List of Reports
The Czech currency ended last year at similar levels against the euro (blue curve) and the dollar as at the beginning of 2023. Economists agree that the first half of the year will be crucial for developments this year.
A brilliant start to the year
“The past year was clearly successful for the Crown, particularly in a global context and within the region. “At the end of the year we saw the crown at weaker levels, but in the long term it is still very strong,” says currency strategist František Táborský from the London branch of ING Bank.
He recalls that at the global level the krona has successfully withstood the interest rate increases of the main central banks, i.e. the US Federal Reserve and the European Central Bank (ECB), but also the record strong US dollar and the high volatility of the financial markets caused by the geopolitical situation .
According to foreign exchange analyst Jan Berka from the Roklen financial group, the “very good” start to last year was mainly due to domestic exporters taking out euro loans and then converting them into krone, causing the krona to climb to a higher level.
“However, this was the end of the strengthening, as foreign factors came into play.” In March, the exchange rate weakened due to banking nervousness in the USA and briefly also in Europe. “On the other hand, during geopolitical events that fortunately did not affect Europe, such as the time of the Russian attack on Ukraine, we saw a fair amount of resistance from the national currency,” says Berka.
Markets are betting on a rate cut
The domestic currency exchange rate is expected to be influenced by several key factors this year, economists point out.
According to CBA’s Seidler, it will primarily be the extent of the economic slowdown in the Eurozone, particularly in Germany, that will also impact the export-oriented domestic economy, but also the speed of interest rate cuts by both the Czech National Bank (ČNB). ) and the European Central Bank.
“A relatively significant interest rate cut by the CNB of more than three percentage points is priced into the exchange rates. Despite this appreciation, the krona is not coming under significant pressure, although the interest rate difference with the euro zone will narrow significantly this year,” explains Seidler.
The interest rate differential is the difference between domestic and foreign interest rates. If this rate is higher in the country, it is a positive difference. Otherwise we speak of a negative interest rate difference. Money that seeks appreciation in countries with high interest rates – so-called “hot money” – represents demand for the currency of the country with high interest rates.
CNB will wait
The market has been betting on interest rate cuts for a long time. However, according to economists, the CNB wants to be sure that the first easing of monetary policy occurs in a situation where inflation expectations are sufficiently anchored and there is no risk of a new outbreak of inflation. However, according to Berka from Roklen, there is no evidence of this.
“The CNB will primarily want to wait for the beginning of this year and the outcome of the January revaluation effect.” The market currently assumes that interest rates could rise from seven percent to levels of four percent or more next year. Faster interest rate cuts could pose the risk of a weaker exchange rate. However, it depends on the economic and market environment in which there would be a faster decline in interest rates,” explains the analyst.
ING’s Táborský believes that the crown will have the most difficult phase at the beginning of the year, on the contrary, it should regain strength in the second half of the year. According to him, the first quarter should mark the start of the CNB’s rate cut, which is negative news for the krona that the markets will have to absorb.
“It is also not yet clear when other central banks, particularly the Fed and the ECB, will start cutting interest rates. If it came later, which is our base case, it would be further negative news for the krone, compounded by the strong US dollar. On the contrary, later this year we will see a revival of the economy, a weaker US dollar and at the same time a complete adjustment of the markets to the CNB interest rate cut,” predicts Táborský.
#Koruna #performed #expected #year