Skyline of Prague, Czech Republic

Czech Republic Exchange Rate April 2020

Czech Republic: Koruna plunges in March on Central Bank rate cuts and coronavirus fears

The Czech koruna plummeted against the euro in recent weeks amid the Central Bank’s aggressive policy easing and sharp risk-off sentiment due to fears over the fast-spreading coronavirus. On 3 April, the koruna ended the day at CZK 27.5 per EUR, marking a 7.5% depreciation from the same day in March. Moreover, the currency was down 6.6% year-on-year and 7.7% year-to-date.

The koruna came under tremendous pressure in March over growing market expectations that the Central Bank would cut rates in response to the Covid-19 pandemic. In a surprise meeting on 16 March, the Bank slashed the two-week repo rate by 50 basis points to 1.75%, and delivered another greater-than-expected 75 basis-point-cut on 26 March to 1.00%, which exacerbated the koruna’s fall further. Analysts also contend that the koruna was particularly hard hit among CEE currencies given it was an overbought currency, as investors piled into it to take advantage of its expected strengthening after the Central Bank dropped the intervention regime that had kept it weak in April 2017. This positioning rendered it extremely vulnerable to sudden shifts in market sentiment, which materialized in March as investors flocked to safe assets when Covid-19 panic set in.

Looking ahead, the currency is expected to recover some of its losses by year-end due to the country’s solid macroeconomic fundamentals. Moreover, the Central Bank has demonstrated willingness to intervene in case of stark fluctuations. Downside risks persist, however, amid the ongoing coronavirus fallout.

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