For details of our strategy, see Trade Recommendation: CZK: Damned if you do and damned if you don’t. We now close our strategy for a total profit of 1.15%. See the sidebar for details on this.
Inception of our strategy coincided with the start of the Swiss central bank’s decisive efforts to curb the strengthening of the Swiss franc and was preceded by generally compressed trading ranges in EUR/CZK since the start of the year and the lowest implied option volatilities since early 2008 on the short end of the volatility curve.
We had argued for the high likelihood of the CZK implied volatilities catching up with in relative terms – the already-elevated peer group volatilities, i.e. HUF and PLN volatilities and the potential benefits of a long gamma exposure. Furthermore, we had put forth a potential scenario of an initial CZK strengthening on the back of the low inflation/low debt burdened Czech Republic’s currency reasserting itself as a regional “safe haven” alternative in an increasingly riskier CEE outlook, followed by a phase of strong CZK depreciation as the monetary policy in export-driven Czech Republic would be significantly loosened to become more accommodative and intolerant of CZK strength.
Looking back at the two-month life span of our option strategy, the implied option volatilities have indeed risen and remained sharply higher, reflecting naturally the growing uncertainties in the external environment. On the spot side, the direction has been steadily and determinedly one way: upwards. While CZK losses against an increasingly pressured union currency EUR since the inception of our strategy are only about one-third of the HUF losses, the relative underperformer of the peer group, it would certainly be a stretch of the imagination to brand the Czech koruna a “safe haven currency” for any part of the past two months.
Looking forward, we expect to see both EUR/CZK and CZK implied vols remaining elevated as the continued woes on the eurozone debt front can be expected to feed into continued uncertainties in the peripheral countries and as the Czech central bank faces little to no reason to shift towards a hawkish monetary stance.
Inception of our strategy coincided with the start of the Swiss central bank’s decisive efforts to curb the strengthening of the Swiss franc and was preceded by generally compressed trading ranges in EUR/CZK since the start of the year and the lowest implied option volatilities since early 2008 on the short end of the volatility curve.
We had argued for the high likelihood of the CZK implied volatilities catching up with in relative terms – the already-elevated peer group volatilities, i.e. HUF and PLN volatilities and the potential benefits of a long gamma exposure. Furthermore, we had put forth a potential scenario of an initial CZK strengthening on the back of the low inflation/low debt burdened Czech Republic’s currency reasserting itself as a regional “safe haven” alternative in an increasingly riskier CEE outlook, followed by a phase of strong CZK depreciation as the monetary policy in export-driven Czech Republic would be significantly loosened to become more accommodative and intolerant of CZK strength.
Looking back at the two-month life span of our option strategy, the implied option volatilities have indeed risen and remained sharply higher, reflecting naturally the growing uncertainties in the external environment. On the spot side, the direction has been steadily and determinedly one way: upwards. While CZK losses against an increasingly pressured union currency EUR since the inception of our strategy are only about one-third of the HUF losses, the relative underperformer of the peer group, it would certainly be a stretch of the imagination to brand the Czech koruna a “safe haven currency” for any part of the past two months.
Looking forward, we expect to see both EUR/CZK and CZK implied vols remaining elevated as the continued woes on the eurozone debt front can be expected to feed into continued uncertainties in the peripheral countries and as the Czech central bank faces little to no reason to shift towards a hawkish monetary stance.