Czech National Bank Maintains Weak Koruna

Czech National Bank Maintains Weak Koruna
April 11, 2016

 
The USDCZK (US Dollar/Czech Koruna) currency pair hit a low of 23.5872 on April 7th, 2016. Even though Czech remains one of the fastest growing economies, there is almost negligible chance for the Koruna to strengthen further because of the factors discussed in this article. Thus, the current scenario presents another safe buying opportunity for forex and binary option traders.

Fundamentally, the Czech economy is performing exceptionally in Europe. The economy grew 4.3% in 2015. The recorded growth is the largest in the past eight years. The Czech National Bank anticipates the economy to grow at 2.7% in 2016 and 3% in 2017. An increase in funding from the European Union, low oil prices and the rise in exports contributed to the GDP growth.

The unemployment rate has decreased to 6.5% in 2015, from 7.6% in 2014. Similarly, the retail sales recorded a growth of 7.6% in 2015, compared to 5.5% in 2014. The trade balance registered a marginal decline in growth of 8% in the fiscal 2015, compared to 8.7% in 2014. Still, the trade surplus of 8 billion (exports of 118 billion and imports of 110 billion) is very positive for the economy.

The interest rate continues to remain at 0.05% for the past four years and continues to spur the economic growth. However, in spite of this the exchange rate of Koruna is not strengthening beyond 23.90 against the US dollar. The reason is the annual inflation rate of 0.1%, which is far below the Central bank’s target of 1% to 3%. Thus, in order to achieve the inflation target, the Czech National bank has to artificially keep the Koruna weaker.

Failure to keep the Koruna weaker would tarnish the image of the Central bank. By allowing the consumer prices to rise and simultaneously maintaining the Koruna weaker artificially, the Central bank hopes to achieve the inflation target. Thus, even though the Koruna has to strengthen fundamentally, the actions of the Central bank will prevent that from happening. The market can never succeed in fighting against the Central bank, whose war chest is practically unlimited.

Technically, the firm commitment from the Czech National bank prevents the Koruna from strengthening beyond an exchange rate of Euro 27. Correspondingly, the exchange rate against the US dollar also remains range bound between 23.74 and 24.98.

USDCZK Technical Analysis - 11th April 2016

Thus, a forex trader should only consider taking a long position at this level. A stop loss, if necessary, can be placed below the 23 levels. The profit should be booked near the 24.90 levels.

To play safe, a no touch option contract should be bought by a binary options trader. The expiry time should be between two and four weeks from the time of purchase. A target level or strike price well below the support price of 23 would augur well for the trade.

Since there is firm passive support from the Central bank near these levels, the price cannot strengthen beyond the 23 level. In fact, none of the retail traders would attempt to pierce the level. Thus, technically, it is one of the easiest and safest trades.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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