December 28, 2017 / 9:11 AM / in a year

Czech crown rebounds after dropping before bank fund calculations

PRAGUE, Dec 28 (Reuters) - The Czech crown jumped over 1 percent against the euro on Thursday, rebounding from a sharp drop in the previous session when end-of-year accounting of banks’ balance sheets had made it more expensive to hold the currency.

The crown has been among the best performing currencies in Europe this year, gaining as much as 6 percent since the central bank freed it from a long-held cap in April. The central bank has also delivered two interest rate increases since August.

Czech banks typically seek to shrink balance sheets at the end of the year, when contributions to a resolution fund are calculated based on deposits, meaning investors faced negative interest rates or fees if they bought crowns on Wednesday, the last settlement date of 2017.

That caused the crown to drop to 25.958 to the euro, its lowest since the start of October. On Thursday, though, the crown rose and was up 1.1 percent at 25.608 at 0844 GMT.

“Today if you buy crowns, it is settled in 2018 and there would be no fees and you can just expect future central bank hikes,” Komercni Banka analyst Marek Drimal said.

He said the impact of the resolution fund on the market was also evident in forwards.

“For instance, 1-month points were around minus-200 yesterday but today around zero, back to normal,” Drimal said. “The resolution fund story is over, and now (the crown) will be dependent on market forces.”

Analysts expect the crown to continue firming in 2018, with the median estimate in a Reuters poll seeing it at 25.000 to the euro in a year’s time.

The Czech National Bank kept its key two-week repo rate unchanged at 0.5 percent on Dec. 21 as a majority on the governing board saw no need to rush with another hike to tame prices in the fast-growing economy. (Reporting by Jason Hovet; Editing by Kevin Liffey)

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