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    EURCZK: Next to Pull the Peg? **UPDATE**

    We interrupt this Greece-watching-Federal-Reserve-worrying-finger-nail-biting market dynamic to bring another matter to your attention.  One of the other nations closely related to the European Monetary Union which has a currency pegged to the euro is making waves by potentially indicating that changes will be made that would banish that peg to the annals of history.  Of course, as you have likely figured out already, I am talking about the Czech Koruna and its established floor to the euro at 27.00.  Once the Swiss National Bank brought the practice of peg pulling, and the risks associated with it, to light, we have been keeping our eye on this pair for the off chance that it might happen again.

    While the original article (found below) indicated that the change may come from the Czech National Bank during their February 5th meeting, that didn’t come to fruition.  In fact, they remained as steadfast as ever in defense of their floor, however, those who made that decision may not be at liberty to do so in the near future.  A longtime opponent of the floor, Czech Republic President Milos Zeman, said today that he would be appointing someone to head the bank whom was more in line with his beliefs on the subject when that time comes.  The only problem is that the appointment won’t be coming until July 2016.

    Regardless of the timetable of the changing of the guard at the CNB, Zeman’s public pronouncement could influence the voting practices of those currently on the board; which means the floor may be in jeopardy.  Adding on to the intrigue is the potential for a Grexit which could severely weaken the euro and overwhelm the CNB if the EUR/CZK falls to 27.00.  If the SNB didn’t feel it had the resources to fight a euro decline, is it really logical for the CNB to believe that they do?  We may soon find out as the EUR/CZK has fallen over 400 pips today and was under 200 pips away from the floor during North American trade.


    For more intraday analysis and trade ideas, follow me on twitter (@FXexaminer ).


    EURCZK: Next to Pull the Peg?

    You know, it can’t be easy being a central banker right about now.  Currencies are swinging wildly on whims of individuals whom are likely growing gray hairs just thinking about what they should do next.  As my colleague Matthew Weller outlined earlier, the central bank world appears to be at war with one another, with the biggest player, the Federal Reserve, maintaining neutrality.  Of course, it could be argued that the Fed started this whole thing with their various forms of monetary easing since 2008, but as of this moment, they aren’t doing anything.  The gauntlets are being thrown quickly too, particularly with the European Central Bank introducing Quantitative Easing and the Swiss National Bank allowing the floor to drop out of their EUR/CHF peg.  It makes me sit back and wonder who will be the next one to act in this global monetary scuffle.

    While many will look to the major central banks for their potential actions, namely those who are scheduled to hold meetings soon like the Reserve Bank of New Zealand, there may be other less well known central banks that will be forced to act as well.  For instance, the Danish Central Bank cut interest rates TWICE this past week alone.  So are there any other central banks in or around Europe that may be losing their shirts trying to defend a floor against the euro?  Ladies and gentleman, I present to you the Czech Koruna.  The barely traded currency pair has a floor on the EUR/CZK at 27.00 and the next monetary policy decision by the Czech National Bank is on February 5th.  Here is the opening paragraph of the last decision by the CNB back in December:

    At its meeting today, the Bank Board of the Czech National Bank decided unanimously to keep interest rates unchanged at technical zero. The Bank Board also decided to continue using the exchange rate as an additional instrument for easing the monetary conditions and confirmed the CNB’s commitment to intervene on the foreign exchange market if needed to weaken the koruna so that the exchange rate of the koruna is kept close to CZK 27 to the euro. The asymmetric nature of this exchange rate commitment, i.e. the willingness only to intervene against appreciation of the koruna below the announced level, is unchanged.

    And here is the SNB’s version, also from December:

    The SNB reaffirms its commitment to the minimum exchange rate of CHF 1.20 per euro and will continue to enforce it with the utmost determination.  It remains the key instrument to avoid an undesirable tightening of monetary conditions resulting from a Swiss franc appreciation.  The SNB is prepared to purchase foreign currency in unlimited quantities and to take further measures, if required.

    Notice anything similar about those two statements?  Yeah, both seem absolute and determined, but the ECB may have changed the game for everyone in the region.  Now I’m not telling you to go crazy and put a large trade on the prospect of the CNB abandoning their floor, but just be aware that the possibility is there.  As for where it might go if they do pull it, using the EUR/CHF as a primer could be the best course of action.  Right before the SNB set their floor, the EUR/CHF was trading near parity, and upon pulling the floor it went to that point and beyond.  Perhaps the EUR/CZK could do the same and revisit 25.00 or even 24.00, which would constitute a 2000 or 3000 pip move in a very short period of time.


    For more intraday analysis and trade ideas, follow me on twitter (@FXexaminer ).

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