Growing chance of Czech koruna overshoot after cap exit

The jump in speculative inflows to the Czech Republic since the start of the year has increased the likelihood that the central bank will bring forward its planned exit from the koruna cap and that the currency may overshoot its ‘fair value’ once this happens. Nonetheless, while it’s possible that the koruna could jump by as much as 10-15% against the euro in the immediate aftermath of the cap being lifted, we expect that it will bounce off these levels. We think it will eventually settle around 5% above the current cap, which would put it at around 25.5/€ by the end of the year.