The key reason of the significant strengthening of the Czech crown is the huge volume of new loans taken by local companies in euros. In recent months, their value has exceeded several hundred billion crowns.
Borrow in EUR if you can
The Czech crown is a ship whose sailors are not in control. It flows adrift in the turbulent global ocean of financial and foreign exchange markets, its direction depending on the wind of external circumstances. These are favourable at this moment, and the Czech currency is thus the strongest in the last fifteen years, despite the record inflation, the payment balance deficit and the stagnation of economic growth.
A significant factor contributing to the strength of the Czech crown is the sharp increase of loans in euros. Companies borrowing euros instead of crowns pay a significantly lower interest – they pay just 4 % p.a. instead of 8 - 9% per year. The total volume of new investment and operating loans in euros therefore exceeded several hundred billion crowns.
At the same time, companies convert 30 - 50 % of the loan back into Czech crowns - thereby strengthening its exchange rate. A sharp increase in loans in euros taken out by domestic companies can be seen at individual banks as well. Komerční banka provided more than half of new loans in euros last year, and the share of loans in EUR exceeded 40% of the bank's total balance sheet. Also, foreign currency traders also confirm the growing interest in conversions from EUR to Czech crowns.
Alois Rasin as an inspiring example
For the board of directors of the CNB and its governor Aleš Michl, the strong crown became a key device in the fight against inflation. Just like the Minister of Finance Alois Rašín in the early 20s of the last century, the current governor is obsessed with a strong crown, also ignores the complaints of exporters who lose their competitiveness. In addition, the CNB undertook to intervene in the foreign exchange market and purchase the crown to protect it against depreciation. This commitment also contributes to the unprecedented recent growth of the crown.
Another factor is the increasing net export to the Eurozone, which continues to grow despite the economic crisis and the strengthening crown. "The trade balance has fallen into a record deficit, but it happened because of the rapid rise of energy costs. Exports to the eurozone, on the other hand, are continously growing, and the mutual trade surplus is reaching record values," says J&T Bank chief economist Petr Sklenář.
When will the tables turn?
The described situation will not last forever. Financing in EUR is becoming less advantageous as the European Central Bank is preparing to increase base rates.
A smaller difference in interest rates will have an impact not only on the volume of euro loans, but also on the attractiveness of Czech crown bonds.
Some traders on the foreign exchange market already start to speculate on the drop in the crown exchange rate, especially against the dollar. In any case, the sentiment of global investors will be the most deciding factor for the crown. They perceive the Czech Republic as an insignificant market where it is possible to profit from high interest rates in the short term, but which can be quickly and painlessly left as soon as any other opportunity appears.
In the case of the Czech financial market, such an opportunity appeared (similarly to other European countries) in the autumn of last year, when Europe managed to stabilize energy prices and avoided catastrophic scenarios.
However, inflation has by no means disappeared – its level is still very high. The US and EU central banks will have no choice but to strengthen the restrictive policy and further increase interest rates. Optimism from the beginning of this year can quickly fade away.
For the Czech Republic, the continued rise in interest rates in the US and the Eurozone would mean an almost certain the sell-off of Czech crown bonds and the depreciation weakening of the Czech currency. In such case, the crown will not have a chance to sail against the wind in the international sea, no matter how hard the crew led by Governor Aleš Michl will try.
SOURCE:
Seznam Zprávy (8.3.2023)
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