* Small market move since FX float, but more volatility can
* Dozens of billions euros still in long crown positions
* Some funds may hold on; but selling may trigger sharp CZK
* Longer-term firming still main scenario
* Crown interventions graphic tmsnrt.rs/2jipWYu
* TAKE A LOOK - crown float coverage
By Jan Lopatka and Claire Milhench
PRAGUE/LONDON, April 12 The Czech crown's
release from an intervention regime last Thursday did not
produce the fireworks seen at the end of the Swiss franc peg,
but a pile of long crown positions held by investors means a
show may yet take place.
The crown traded at 26.63 on Wednesday -- 1.4 percent
stronger that the 27 level the central bank held for over three
years. It was a far cry from the jump some investors had hoped
for when they prepared for the cap to be dropped.
So the majority of positions waiting for greater strength --
between 20 and 60 billion euros worth, analysts reckon -- are
still in place.
The market view is that the crown's fundamental value is a
few percent stronger that the current level, but the amount of
crowns still around, after the bank bought more than 70 billion
euros in interventions, stands in the way.
"The potential for any bigger firming is mitigated by these
positions. If people close them, it can run higher," ING chief
economist Jakub Seidler said. "I don't think any significant
part has flown out so far."
Forward rates indicate only modest crown gains ahead. The
three-month outright forward, pricing where the
market believes the currency will move, traded at 26.54 on
Tuesday. A one-year forward was at 26.48.
Trading volumes on the interbank market have not been huge,
measured by the number of trades on the main euro/crown trading
platform, Reuters Matching.
The system recorded 2,437 euro/crown spot trades on
Thursday, the second highest daily activity since late 2013. But
the number fell back to 476 on Tuesday, not far above 2017's
"I would not want to be in (the long-crown) people's skin
right now. One loses nerve, then a second and a third and there
could be quite a mess," one trader in Prague said.
Position closing could move the crown to the weak side of 27
and more if stop-losses are triggered by selling.
The central bank has made clear it would not, initially,
stand in a way of large swings. In a radio interview, Governor
Jiri Rusnok said he would not be bothered by the crown at 24 or
30 per euro.
Weakening could hasten interest rate hikes from the current
0.05 percent, providing a bigger rate differential over the euro
zone, which would in turn attract crown buyers. But a firmer
currency could push hikes further into 2018.
Claudia Calich, a fund manager at M&G, said she would hold
on to her long crown position in part due to uncertainty over
the French presidential election on April 23 and May 7, though
she was aware of the risk from market positions.
"It’s an open economy, but in terms of contagion if you have
any large negative shocks for the euro zone, the currency should
still outperform the euro," she said.
"The biggest risk to the trade is the very large positioning
in the market and what other investors will do now the floor has
been removed – for example, if everyone rushes to the door at
the same time."
Bryan Carter, head of emerging market fixed income for BNP
Paribas Investment Partners, acknowledged the positioning risk,
which is why he is limiting his exposure to about 2 percent of
He takes a longer view, positioning in bonds, which offer
higher yields than German bonds. "If you take that 10-year view,
we’re at a very favourable valuation... So we have an enormous
base for the crown to deliver returns," he said.
Part of the positioning is held by companies in the heavily
export-focused economy hedging euro revenue. This will not add
to crown selling, but their demand will also be slow to return.
The overall economic picture -- unemployment the lowest in
the European Union at 3.5 percent under Eurostat methodology and
the purchasing manager sentiment near a six-year high -- speak
for a firmer currency.
JP Morgan said in a note the crown should firm overall
despite the positioning. It expected the crown in a range of
26.00-26.25 by the end of the year. ING sees it at 25.50.
Central bank chief Rusnok said on Tuesday the bank was
surprised by the market calm and this did not have to last.
"The amount of crowns bought by market players ... is huge,
and it is clear that searching for a longer-term balance will
take some time, there can be much bigger swings."
(Additional reporting by Sujata Rao in London; Writing by Jan
Lopatka Editing by Jeremy Gaunt)