Czech Koruna Weakens on Poor PMI Data

Czech Koruna Weakens on Poor PMI Data

In the aftermath of the Brexit referendum, the Czech Republic saw its currency exchange rate decline sharply like any other European country. More than 10% of Koruna’s value was eroded, relative to the Japanese Yen. From a high of 4.506, the exchange rate of CZKJPY plunged to 4.091 in a matter of two weeks. The announcement of the new stimulus package by Shinzo Abe enabled a recovery in the currency pair to 4.382. However, the inherent weakness in the Czech Koruna, due to the reasons explained below, pulled the pair to 4.22 on Friday’s close. Considering the latest economic developments in Japan, we believe that the CZKJPY will decline further.

The Czech National Bank anticipates GDP growth of the country to slow down to 2.3% in 2016. The economy expanded at a pace of 4% in 2015. The PMI (Purchase Managers’ Index) reading declined to 51.8 in June, from 53.3 in May. A decline in the reading from the prior month indicates that the business is facing headwinds in the current quarter. The youth unemployment rate in June increased to 11.40%, from 10.80% in May.

Last week in Japan, the Prime Minister announced a stimulus package of Y28 trillion ($265 billion). It was higher than the market’s expectation of Y20 trillion. Following the announcement, the Yen fell on the market’s anticipation that the Bank of Japan would follow with a similar monetary easing measures. During the two day monetary policy meeting held last week, the BoJ left the interest rate unchanged at -0.5%. The BoJ only announced that it would increase the purchase of the exchange traded funds to Y6 trillion, from the current Y3.3 trillion. Unfortunately, the market was not impressed by the ETF purchase announcement. The market participants now have a bullish view on the Yen and it is likely to reflect on the CZKJPY pair. Thus, fundamentally, we can hope for a decline in the CZKJPY pair.

CZKJPY - Technical Analysis - 1st August 2016

So, a Forex trader can go short near 4.23 with stop loss above 4.25. The short position can be diluted near 4.16. The risk to reward ratio for the trade is about 1:3.

To make a hefty profit, a binary trader can pick up a ladder put option contract for the CZKJPY pair. The lowest target price in the put option should be higher than 4.16. A four week time frame for the contract expiry would increase the probability of success in the trade.

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