The krona strengthened against the euro on Monday morning to its strongest level since 2008, and it also strengthened significantly against the dollar. He is helped by the post-covid boom in Chinese and Asian markets and the prospects of a weakening dollar, writes economist Lukáš Kovanda in his commentary.
During trading this morning, the Czech currency strengthened to its strongest all-time level against the euro since November 3, 2008, when it strengthened against the euro at a rate of 23.927. The last time it traded at a stronger level was on November 3, 2008, when it strengthened to a rate of 23.865, according to data from Bloomberg. Since then, it has never been nominally as strong as it is today, even when it temporarily broke the 24.00 per euro level in February 2011.
The krona is also appreciably strengthening against the dollar, reaching 22.394 during trading, its highest level against the US currency since 21 April last year.
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During yesterday’s trading, the Czech currency improved on its all-time high of the last twelve years, when it strengthened against the euro to 23.955. It last traded at a stronger level on Feb. 7, 2011, according to data from Bloomberg. However, this week, especially Wednesday, closed trading at its strongest-ever close of 23.982, also since Oct. 29, 2008.
Riskier assets are back in vogue
There is another reason for today’s strengthening of the crown the improved sentiment on world markets and the related greater willingness of investors to place their money in riskier currencies than, for example, the US dollar. Mood improved as early as Friday in response to the slowdown in US wage growth. That means easing inflationary pressures in the world’s strongest economy. If these pressures ease enough, the US central bank won’t raise interest rates as much. This is good news for the equity markets, but also for the krona currency markets more generally. The easing of US monetary policy tightening then eases the pressure on the strengthening of the dollar, also due to the not so significant interest rate of this currency and dollar assets, which again drives the crown currencies.
Good news from China
Favorable news for the Czech crown also comes from China today. The economy there opens after her the Beijing regime got rid of the draconian restrictions. Furthermore, according to yesterday’s information, Beijing will support Chinese families and businesses to better manage the return to normality of the economy. The Chinese economy thus receives a significant positive boost, which is also transmitted to other Asian economies such as Taiwan or Korea.
Stock market indicator The MSCI Emerging Markets Index is therefore entering a so-called bull market today. This generally occurs when a given stock market indicator rises by at least 20 percent from its lowest value. The indicated gauge fell all the way on Oct. 24, 2022. From that point to now, it has gained just over 20 percent. It consists mainly of Chinese stocks, but stocks from other developing economies, such as Korea or Taiwan, also play a key role.
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A strong krone will ease the gas market
As a rule, the Czech economy is also classified as a developing market. Thus, the aforementioned growth in Asian emerging markets, coupled with weaker pressures for further dollar strength, has a notable effect on the record strengthening of the Czech koruna since 2008.
The strengthening of the crown is good news for those Czechs who are planning a vacation abroad. They will have cheaper shopping there, especially if they are heading to a euro-denominated country. But the strengthening of the corona will also make imported goods, such as electronics, but also oil, petroleum products and natural gas cheaper. These are items that are normally traded in dollars. The strengthening of the crown will therefore contribute to their lower prices. Although against the dollar, it should still be a little more pronounced, so that it can be more significantly reflected in prices for end customers.
But it is true that, for example, fuel in the Czech Republic is now relatively cheap – at least by the standards of the last twelve months – also because the crown is getting stronger. The strengthening crown can do the same ease the gas market. The government has capped its prices since the beginning of January. The cheaper – after conversion into kroner – gas is on world markets, the lower the costs associated with the cap will ultimately be for the Czech government. If the strong koruna contributes to the cheaper gas, the government will not spend as much on ceiling compensation and will not have to deepen the deficit and debt as if the koruna were weaker.
