Market Research | Eurozone & Czech Republic
January 25 | 2017
IS THERE REALLY A MISSING COUNTERPARTY?
WILL EURCZK MIRROR EURCHF AFTER THE EXIT?
▌ MARTIN LOBOTKA, (+420) 777 027 165, [email protected], [email protected]
▌ A new specter is haunting the EURCZK FX market:
a specter of missing counterparty.
▌ As a quick glance at statements from previous
monetary policy meetings reveals, CNB has been
talking about “missing counterparty” for some
time now, but only now this became a marketwide story. And, naturally so – January 2017 saw
what was very likely the biggest speculative inflow
into CZK.
▌ Back to CNB. Whereas until June, 25 2015 meeting,
CNB had been saying that the pass-through of
weaker CZK to nominal variables would alone
ensure that CZK will not strengthen after the exit 1,
after the first wave of speculations came in
summer 2015, it added, in August 2015, that this
was just one of the factors 2. This slight change was
further elaborated on in February 2016 when CNB
gave a list of reasons why CZK will not strengthen
after the exit. 3 The “missing counterparty”
argument has been a staple in the CNB
communication since.
1
„The subsequent return to conventional monetary policy will not
imply appreciation of the exchange rate to the level recorded
before the CNB started intervening, as the weaker exchange rate
of the koruna is in the meantime passing through to prices and
other nominal variables. “↗
2
„The subsequent return to conventional monetary policy will not
imply appreciation of the exchange rate at the forecast horizon to
the slightly overvalued level recorded before the CNB started
intervening, among other things because the weaker exchange
rate of the koruna is in the meantime passing through to domestic
prices and other nominal variables. ↗
3
„The Bank Board stated that any exchange rate appreciation
following the discontinuation of the exchange rate commitment
would be dampened, among other things, by hedging of
exchange rate risk by exporters during the existence of the
commitment, by the closing of koruna positions by financial
investors and by possible CNB interventions to mitigate exchange
rate volatility. ↗
▌ ‘Missing counterparty’ has been brought to the
forefront again recently. CNB Governor Rusnok
mentioned it in a recent interview with local
internet outlet (in Czech, ↗ ) and so did, in a
Bloomberg interview, another Board member,
Mojmir Hampl: “There is still our hypothesis of the
missing counterparty. We will have the euros, and
if everybody is trying to buy the euros and exit
from those koruna positions, who will be on the
other side of the trade if it’s not the central bank?
This is one market factor that everybody should be
aware of.”
▌ The analyst, bankers and commentators making
this argument usually just take it for granted that it
will be so and rarely give more quantitative details.
ING, for example, bases the missing counterparty
argument on the premise that based on “the
current account balance adjusted for reinvested
earnings, the fundamental demand of the Czech
economy to sell EUR/CZK is not higher than EUR
6bn per year”. CNB doesn’t get into details at all.
▌ In an ordinary year / from the long-term
perspective, the current account (CA) argument is
correct: current account balance is indeed the
measure of the natural demand of the economy to
sell EURCZK. Current account without reinvested
earnings 4 is, after all, a measure the readers of the
Weekly (see for example page 4 here ↗) will recall
I regularly use as a proxy for the natural demand of
4
The reinvested earnings are subtracted since they are included
in the current account figures as part of the dividends from FDIs
but have no FX impact.
42 FS Market Research | A closer look at missing counterparty | Special report
See disclaimer at the end of document (► 5) | www.42fs.com | Bloomberg / Thomson Reuters: FTFS
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Market Research | Eurozone & Czech Republic
January 25 | 2017
our economy to sell euros in exchange for CZK. 5
This indicator stood at CZK 178 bn. in last 12
months ending November 2016, and has been
continually increasing since the intervention, a
reflection of and a testament to an undervalued
currency.
200
▌ After the exit, the sellers of the euro will be those
who’ve bought CZK against foreign currency in the
run-up to the exit. These are those denoted in the
media as “speculators”. But how many are there
and what is the size of their position? This can be
inferred from the CNB FX operations data: CNB
bought EUR 30.091 bn. between November 2013
and November 2016 (last actual data).
12-m current account balance - with and without reinvested earnings
(CZK bn.)
150
40
100
Spot FX transactions of CNB (EUR bn.), monthly and cumulatively
(dots denote forecast for Dec'16 and Jan'17)
35
50
30
0
25
-50
20
-100
15
-150
10
-200
5
▌ However, since the exit year is unlikely to be
ordinary and since short-term post-exit trading can
be very different from the long-term one (the longterm view is unambiguously for CZK to get
stronger), let us look at both sides of the market to
examine what / who will drive the short-term
dynamics.
5
The biggest positive component of the CA is the balance of
trade with goods and services, which is countervailed by the big
negative balance in the income balance. Simplifying, net inflows of
euros from trade surplus are more than sufficient to cover
dividends being paid out abroad, the remainder left to drive CZK
gradually stronger over time.
X-16
XII-16
VI-16
VIII-16
II-16
IV-16
X-15
XII-15
VI-15
VIII-15
II-15
IV-15
X-14
XII-14
VI-14
VIII-14
II-14
IV-14
SOURCE: CNB (ACTUAL DATA) AND 42 FS (DECEMBER /
JANUARY ESTIMATES)
▌ To this, one has to add whatever one thinks were
the net speculative inflows in December 2016 and
in January 2017. Judging from the EURCZK fall in
the forward market, from the fall of the XCCY basis
swaps or, better still, from the sterilization
operations of CNB in early January, one comes to
about CZK 200 bn. in new net inflows in January
(and nothing or almost nothing in December). This
thus brings the total FX operations of CNB since
November 2013 to EUR 38 bn., i.e. to about CZK
1000 bn.
1100
Liquidity sterilization operations of CNB in 2017, CZK bn.
(volume at the end of day)
1050
12-month current account and components
Balance of Income
X-13
SOURCE: CNB
350
300
250
200
150
100
CZK50
bn.
0
-50
-100
-150
-200
-250
-300
-350
0
VIII-13
1-10 7-10 1-11 7-11 1-12 7-12 1-13 7-13 1-14 7-14 1-15 7-15 1-16 7-16
XII-13
-250
1000
Balance of Services
Trade Balance
Current Account
950
900
850
800
750
SOURCE: CNB
18-Jan
17-Jan
16-Jan
15-Jan
14-Jan
13-Jan
12-Jan
11-Jan
10-Jan
9-Jan
8-Jan
7-Jan
6-Jan
5-Jan
4-Jan
3-Jan
2-Jan
6.16
6.15
12.15
6.14
12.14
6.13
12.13
6.12
12.12
6.11
12.11
6.10
12.10
6.09
12.09
12.08
700
SOURCE: CNB
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Market Research | Eurozone & Czech Republic
January 25 | 2017
0
1000
4500
900
4000
800
3500
700
3000
600
2500
500
2000
400
CZK Forward,FX Swaps avg. daily
turnover, mil. USD
1500
300
Oct-16
Oct-15
Apr-16
Oct-14
Apr-15
Oct-13
Apr-14
Oct-12
200
Apr-13
Oct-11
Apr-12
Oct-10
1000
Apr-11
CZK Spot average daily turnover,
mil. USD
SOURCE: CNB
▌ The most recent CNB survey shows that the
percentage of expected exports in next twelve
months that was hedged against the currency risk
using financial instruments was, at the end of
2016, historically very low, at 27.6%. The average
before the intervention (1Q11-3Q13) was 35.1% 6
whereas the average over all of the periods for
which we have the data (1Q11-4Q16) is 34.85%.
Although in January 2017 this share likely went up,
there’s still about 7.25-7.5 % of exports to be
hedged if the exporters are to get to the “normal”
level of “coverage”.
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
to 12 months that moved a lot (while longer date
swaps remained fairly stable), I infer this “carry
trade group” is not large. Secondly, the
coincidence in timing of the XCCY spikes (in both
2015 and 2016 in September) may indicate the
roll-over rather than unwinding of original summer
2015 positions. This plus the stability of spot
EURCZK seem to indicate that there has not yet
been a massive closure of speculative positions
entered into in summer 2015. In other words, the
overall stock of speculative money, while not
automatically equal to CNB FX operations, is in
my opinion lower than CZK 1000 bn., but not
substantially so. This, then, is the total amount of
money that at some point will want out.
5000
Oct-09
▌ That said, since it was only the forwards / XCCY up
there is still lots of them is seen not only in the
moribund forward market activity to date, but also
from CNB surveys.
Apr-10
of speculative outflows immediately after
intervention. First, some of the first-wave flows
that CNB sterilized back in 2H15 may have already
left without causing any visible movement in the
market (spot or forward one). Second, in theory,
some of the flows may be primarily motivated by a
‘carry trade’ logic: with cross currency basis swap
deeply negative (at 1 year recently almost -220
bps.) it makes sense for Euro investor to just do
the basis swap and pay PRIBOR + basis (i.e. 30-220
bps) to get CZK to invest in even deeply negative
Czech government bonds (or get local bank to
deposit these for repo - something at CNB).
▌ First, of course, the unhedged exporters. That
Apr-09
▌ Now, this doesn’t automatically equal the volume
Percentage of expected exports in next 12 months that is
hedged against currency risks using financial instruments
(CNB Survey)
45
43
-50
41
39
-100
37
35
33
-150
31
29
SOURCE: 42 FINANCIAL SERVICES
Jul-16
Nov-16
Nov-15
Mar-16
Jul-15
Mar-15
Jul-14
Nov-14
Mar-14
Jul-13
Nov-13
Nov-12
Mar-13
Jul-12
Mar-12
25
Nov-11
3Y EURCZK cross-currency basis swap, bps.
Jul-11
-250
27
1Y EURCZK cross-currency basis swap, bps.
Mar-11
-200
SOURCE: CNB
▌ Who can take the other side of the market should
this money decide to leave en masse after the exit
announcement? In other words, who can buy CZK
and sell euros? I see two big groups.
6
This makes sense as import intensity of exports is about 70-75%,
so big part of the export is naturally hedged via euro costs.
42 FS Market Research | A closer look at missing counterparty | Special report
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Market Research | Eurozone & Czech Republic
January 25 | 2017
▌ Theoretically. The huge problem with idea of
EURCHF
1.2
1.15
1.1
1.05
1
Jan-17
Nov-16
Dec-16
Sep-16
Oct-16
Aug-16
Jun-16
Jul-16
Apr-16
May-16
Jan-16
Feb-16
Mar-16
Nov-15
Dec-15
Sep-15
Oct-15
Aug-15
Jun-15
Jul-15
Apr-15
May-15
0.95
Jan-15
est. CZK 3778 bn. in 2016, this means exporters
still have unhedged exports amounting to CZK 270280 bn. This could cover a third or so of the
outgoing speculative money. However, in view of
the prevalent view that CZK will strengthen in the
coming years, it is now quite likely that exporters
will hedge for longer (2-3 years). Therefore, the
amounts concerned may be much higher than 270280bn. arrived at above and so could theoretically
be a match for the outgoing speculators.
1.25
Feb-15
Mar-15
▌ Considering that the nominal exports amount to
SOURCE: 42 FINANCIAL SERVICES
unhedged exporters being the counterparty to
the exit trade is that they’re likely to hedge
before the exit (and hence inflate the CNB FX
reserves) and not after the exit. Considering the
media coverage of the CZK, CNB communication
and the activity of commercial banks eager to do
business with exporters after couple of years of
EURCZK stagnation, it is likely that most of them
will have hedged by the time of CNB exit
announcement.
▌ Second big group of those in need to sell euros for
CZK are those owning euro-denominated assets.
This group includes asset managers and financial
companies and owners of euro-generating assets
(for example developers). Here, however, the
same thing applies: although the volumes
concerned may be large, these agents are
sophisticated enough to be very likely to hedge
before the exit, again only increasing FX reserves
of CNB.
▌ Summing up, and as we wrote in our recent
Quarterly ↗, the EURCZK is unlikely to follow the
path EURCHF took in January 2015, and thus fall
rapidly. There’s a huge difference in market
positioning here. In Swiss case, almost everyone
was betting on continuation of the floor and on
EURCHF heading higher (which looked like a riskfree deal, with downside limited courtesy of SNB’s
commitment) and no one was speculating on the
floor abandonment. Here, almost everyone is
betting on early exit of CNB and EURCZK heading
lower. As December inflation structure shows (see
pages 3-5 here ↗) and as the look at the both side
of the post-exit FX market reveals, investors can be
disappointed in both of these expectations.
Beware.
42 FS Market Research | A closer look at missing counterparty | Special report
See disclaimer at the end of document (► 5) | www.42fs.com | Bloomberg / Thomson Reuters: FTFS
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Market Research | Eurozone & Czech Republic
January 25 | 2017
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