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ČNB, Koruna, Intervence ČNB

ČNB, Koruna, Intervence ČNB

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Published by Ivana Levá

Czech: Visualising stimulus needs We shift to see 26.00-26.25 as a key area for CNB based on analysis of its models, retain a negative strategy bias on CZK In our 2013 outlooks we saw CNB intervention as our baseline in late Q2 and roughly defined 25.75-26.00 as an important floor for intervention in EURCZK. Following comments this morning from Governor Singer that there was a “readiness for FX intervention if more loosening was needed”, we need to define more clearly how this links in with our call. We believe the CNB MPC is looking at the issue similar to the way the market considered QE in the US – the policy „add-on‟ needed when „required‟ interest rates defined by say a Taylor rule, turn negative. That is, if negative nominal rates are needed, how much FX depreciation (in real terms – computed into the nominal EUR cross) would achieve the same level of monetary conditions. We look at the CNB‟s own 3m PRIBOR forecast from the Q4 Inflation Report and make a best efforts forecast of how it might look now. Lower „monetary policy relevant inflation‟ prints (1.1% vs 1.4% it forecast for end-Q4) and lower growth all shift the CNB rate forecast lower, while a weaker currency offsets that slightly, through already looser monetary conditions and a higher CPI via pass-through. In Figure 1 we present our interpretation of where the new Q1 Inflation Report rate path could come based on presumed shifts to outer probability fan forecasts for GDP and CPI, while assuming the CZK is flat here at weaker levels than in the Q4 Report. It shows the forecast shifts down with the 3m market at -0.9% in Q4 2013 with rates at -0.4% in Q2. Note 3m PRIBOR is currently at 0.50% with base rates at 0.05%. That is the easy bit. The hard thing is to try and transfer that into an assumption of what the CNB thinks the required equivalent FX depreciation is, which has the same effect as the negative rates in Figure 1. There are several ways to achieve this. The first method is to assume that a certain depreciation of the nominal exchange rate is required to shift the 3m PRIBOR forecast back to the current rate of 0.50% from the underlying forecast given in Figure 1 and assume that is the same in its model as loosening monetary conditions via a negative market rate

Czech: Visualising stimulus needs We shift to see 26.00-26.25 as a key area for CNB based on analysis of its models, retain a negative strategy bias on CZK In our 2013 outlooks we saw CNB intervention as our baseline in late Q2 and roughly defined 25.75-26.00 as an important floor for intervention in EURCZK. Following comments this morning from Governor Singer that there was a “readiness for FX intervention if more loosening was needed”, we need to define more clearly how this links in with our call. We believe the CNB MPC is looking at the issue similar to the way the market considered QE in the US – the policy „add-on‟ needed when „required‟ interest rates defined by say a Taylor rule, turn negative. That is, if negative nominal rates are needed, how much FX depreciation (in real terms – computed into the nominal EUR cross) would achieve the same level of monetary conditions. We look at the CNB‟s own 3m PRIBOR forecast from the Q4 Inflation Report and make a best efforts forecast of how it might look now. Lower „monetary policy relevant inflation‟ prints (1.1% vs 1.4% it forecast for end-Q4) and lower growth all shift the CNB rate forecast lower, while a weaker currency offsets that slightly, through already looser monetary conditions and a higher CPI via pass-through. In Figure 1 we present our interpretation of where the new Q1 Inflation Report rate path could come based on presumed shifts to outer probability fan forecasts for GDP and CPI, while assuming the CZK is flat here at weaker levels than in the Q4 Report. It shows the forecast shifts down with the 3m market at -0.9% in Q4 2013 with rates at -0.4% in Q2. Note 3m PRIBOR is currently at 0.50% with base rates at 0.05%. That is the easy bit. The hard thing is to try and transfer that into an assumption of what the CNB thinks the required equivalent FX depreciation is, which has the same effect as the negative rates in Figure 1. There are several ways to achieve this. The first method is to assume that a certain depreciation of the nominal exchange rate is required to shift the 3m PRIBOR forecast back to the current rate of 0.50% from the underlying forecast given in Figure 1 and assume that is the same in its model as loosening monetary conditions via a negative market rate

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Published by: Ivana Levá on Jan 17, 2013
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Nomura |EM Chart Alert17 January 2013
Nomura International plc
See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures
Fixed Income Research
Strategist
Peter Attard Montalto
+44 20 7102 8440peter.am@nomura.com
This report can be accessed electronicallyvia: www.nomura.com/research or onBloomberg (NOMR)
 
EM Chart Alert
Emerging Markets Research | EEMEA
 
Czech: Visualising stimulus needs
17 JANUARY 2013
We shift to see 26.00-26.25 as a key area for CNB based onanalysis of its models, retain a negative strategy bias on CZK
 
In our 2013 outlooks we saw CNB intervention as our baseline in late Q2 and roughlydefined 25.75-26.00 as an important floor for intervention in EURCZK. Following
comments this morning from Governor Singer that there was a “readiness for FXintervention if more loosening was needed”
, we need to define more clearly how thislinks in with our call.We believe the CNB MPC is looking at the issue similar to the way the marketconsidered QE in the US
 –
 
the policy „add
-
on‟ needed when „required‟ interest rates
defined by say a Taylor rule, turn negative. That is, if negative nominal rates areneeded, how much FX depreciation (in real terms
 –
computed into the nominal EURcross) would achieve the same level of monetary conditions.We
look at the CNB‟s own 3m PRIBOR forecast from the Q4
Inflation Report andmake a best efforts foreca
st of how it might look now. Lower „monetary policyrelevant inflation‟ prints (1.1% vs 1.4%
it forecast for end-Q4) and lower growth allshift the CNB rate forecast lower, while a weaker currency offsets that slightly,through already looser monetary conditions and a higher CPI via pass-through. InFigure 1 we present our interpretation of where the new Q1 Inflation Report rate pathcould come based on presumed shifts to outer probability fan forecasts for GDP andCPI, while assuming the CZK is flat here at weaker levels than in the Q4 Report. Itshows the forecast shifts down with the 3m market at -0.9% in Q4 2013 with rates at-0.4% in Q2. Note 3m PRIBOR is currently at 0.50% with base rates at 0.05%.That is the easy bit. The hard thing is to try and transfer that into an assumption of what the CNB thinks the required equivalent FX depreciation is, which has the sameeffect as the negative rates in Figure 1. There are several ways to achieve this. Thefirst method is to assume that a certain depreciation of the nominal exchange rate isrequired to shift the 3m PRIBOR forecast back to the current rate of 0.50% from theunderlying forecast given in Figure 1 and assume that is the same in its model asloosening monetary conditions via a negative market rate.
Fig. 1: 3m PRIBOR CNB model forecasts changes from Q4Inflation Report
Source: CNB, Nomura
Fig. 2: EURCZK depreciations required to loosen monetaryconditions
Source: Nomura
-2-10123IV/10I/11 II III IV I/12 II III IV I/13 II III IV I/14 II90%70%50%30% confidence intervalNew?%24.024.525.025.526.026.527.027.528.028.5IV/10I/11 II III IV I/12 II III IV I/13 II III IV I/14 IICNB MCI decompositionModel based dynamicModel based staticModel based rawFlat Q1Nom Taylor rule based MCI
 
Nomura | EM Chart Alert 17 January 2013 
2
In Figure 2 we show that as the “Model based raw”
line. It shows a significantdepreciation to peak at 28.0 in EURCZK
 –
clearly extreme. However, we mustconsider that there is an effect in the model of a weaker currency on higher inflationand so higher implied market rates (offset by strong growth). If we have thisassumption in a one step, i.e. assume the model is static then there is an implied
depreciation in Figure 2 of the “Model based static” path. However in reality the CNB
model will not be static, it will be dynamic and involve circular, interdependence of variables that must be solved for simultaneously. We clearly cannot undertake suchan exercise ourselves, but with a few assumptions and solving some simple rulessimultaneously we can arrive at a best guess
 –
 
which is our “Model based dynamic”
 line in Figure 2. This would see the currency cross peak at 26.4.That route is conceptually quite a black box however. A simpler method is to assumethat we are trying to keep the MCI (monetary conditions indicator) constant when wecannot bring rates lower (below 3m PRIBOR at 0.5%) and so calculate the FXdepreciation required. Utilising 2.5:1 MCI weights on interest rates vs FX (all in realterms) we can again extract
the “CNB MCI decomposition” line in Figure 2
, whichshows EURCZK needing to peak at 26.0.The final way is to take our own simple Taylor rule (Figure 3) based on our growth
and inflation views (which are not that dissimilar from the CNB‟s) and
what negativerates are produced from the results and again back this out into a depreciation path.
That gives us the “Nomura Taylor rule based MCI” line in
Figure 2, which seesEURCZK peak at 26.3.
Fig. 3: Nomura Taylor rule
Source: Nomura
Fig. 4: Average depreciation required by models in Q2-Q4
Source: Nomura
Fig. 5: Indicative currency regime
Source: Nomura
-1.50-1.00-0.500.000.501.001.50Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14
Base RateTaylor Rule
%Nomuraforecast27.5526.6826.1426.0925.8425.526.026.527.027.528.025.5025.7526.0026.2526.5026.75
   I  n  c  r  e  a  s   i  n  g    i  n   t  e  r  v  e  n   t   i  o  n   a  g  r  e  s  s   i  o  n   I  n  c  r  e  a  s   i  n  g    i  n   t  e  r  v  e  n   t   i  o  n   p  r  o   b  a   b   i   l   i   t  y
 
Nomura | EM Chart Alert 17 January 2013 
3
Combining all this together we get Figure 4, which shows what the average FX rateshould be under various different models to produce the equivalent set of monetaryconditions as negative 3m PRIBOR rates. Based on our detailed modeling we shiftup our view of where the soft floor for CNB will be to 26.00 and think there will becomfort with EURCZK in the 26.00-26.25 range. The further below this level thegreater the probability of intervention and the higher the aggression.We think this will fit with not only its models (the CNB and MPC are very model basedas seen in the past), but also a degree of conservatism on the MPC. Indeed, theMPC is very split on the need for FX intervention, with probably three out of sevenmembers currently in favour, two firmly against and two swing voters, whose backingwill be needed to get intervention to occur. As we have said before we think that willoccur as the forecast deteriorates further and inflation (particularly core monetarypolicy relevant inflation) being so low. Of course continued optimism on the eurozonemeans a shock from there seems less likely, but could well play a part if things aboutface there.In sum, though we see intervention occurring in FX because of an already over-liquidbanking sector in a liquidity trap making fixed income postmodernism policiesunsuitable, while the currency is more easily handled (as we are talking aboutdepreciation without running down reserves (something of anathema to aconservative central bank like the CNB)). We see such intervention then on the needto loosen monetary conditions to replicate the need for negative short-run rates, andthat based on its models Q2 seems the most likely time for it to occur and thenunsterilised intervention to take place to target a soft floor of 26.00 with a comfortzone stretching up to 26.50. Such a decision would be announced at an MPCmeeting, in our view.With this in mind there is still clearly upside in EURCZK and so we keep our bias togo long that cross at some point in the near term, though still do not like thetechnicals for that trade at present.

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