Koruna Sinks After CNB Formally Ends FX Intervention Regime

The Czech koruna tumbled across the board after the CNB left interest rates unchanged (as expected) but decided to formally end its FX intervention regime. EUR/CZK rallied as high as to 24.260 (+1.23%) before trimming gains to last trade at 24.167 (+0.86%). The upswing allowed the pair to print its best levels since Dec 30, 2022. The pullback from highs was likely driven by profit taking coupled with the realisation that the CNB reaffirmed its readiness to step into FX markets again if price stability comes under threat.

• The CNB launched the intervention regime in May 2022 but has not been active in the market since October 2022. While the Bank Board decided to scrap the intervention regime and resume the programme of sales of part of the income on international reserves, it said that "as a matter of principle" it remains ready to "prevent excessive fluctuations of the koruna exchange rate that would jeopardise price stability or financial stability, at any time the Bank Board deems it necessary."
• The recent hints towards a more permissive stance on FX matters included comments from Deputy Governor Eva Zamrazilova, who outlined expectations of EUR/CZK strengthening "by about 1 koruna in the course of the year." The lack of signs of interventions over the past few months has also suggested relative comfort with current EUR/CZK levels. Still, judging by market reaction, the decision took participants off guard.
• Governor Ales Michl will hold a press conference at 14:45BST/15:45CEST to deliver a full statement, unveil the main parameters of the updated macroeconomic forecast and take questions from reporters. The case for another pushback against dovish market bets still stands, especially after the decision to end the FX intervention regime.