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Forex: The Case for a USD/CZK Breakout

Forex: The Case for a USD/CZK Breakout

2014-02-04 22:03:00
Ariel Witulski, Technical Strategist
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Talking Points:

• Time to Exit USD/PLN Longs

• Impact of Central Bank Policies

• New Long Opportunity in USD/CZK

In recent weeks, we recommended selling the Polish zloty (PLN) against the US dollar (USD), and since mid-January, this trade played out nicely and USD/PLN hit our target of 3.15.

Also read: A USD/PLN Breakout with the Best Kind of Confirmation

In normal conditions, I might suggest letting the trade run for a bit longer, however, when taking into account the ongoing turmoil in emerging market currencies, it would be most prudent to exit here instead.

Recent Bounce in USD/PLN

The_Case_for_a_USDCZK_Breakout_body_USDPLNBounce.png, Forex: The Case for a USD/CZK Breakout

The National Bank of Poland is meeting this week, and at the most recent conference, central bank Governor Marek Belka signaled that interest rates will stay low for at least the next six months. As a result, despite volatility in emerging markets, we don't expect a rate hike, especially because December’s CPI reading stood at 0.7% year-over-year, which was extremely low.

Nevertheless, if Poland’s currency depreciates further due to continued deterioration in emerging markets, we may well see another round of central bank intervention. The Bank does have a track record with regards to unannounced interventions, which were carried out in both 2011 and 2013 in efforts to defend the local currency and curb exchange rate volatility.

Given the fundamental backdrop, a safer course of action would be to sell the Czech koruna (CZK) against the us dollar instead, because the Czech central bank is actively looking to talk down the exchange rate and put a floor on EUR/CZK.

See also: USD/CZK: The Best Emerging FX Opportunity

In addition, the latest Eurozone CPI reading came out at 0.7%, causing speculations that the European Central Bank (ECB) will act to fight deflation. Any ECB rate cut or form of easing would put even greater pressure on the Czech central bank to defend the EUR exchange rate, and it would need to sell even more CZK, a move that would give lift to long USD/CZK positions.

USD/CZK: Case for a Breakout

The_Case_for_a_USDCZK_Breakout_body_usdczkbreakout.png, Forex: The Case for a USD/CZK Breakout

Looking at the chart above, USD/CZK was locked in a narrow range, but following the Fed’s taper announcement, it seems the pair is finally ready to move substantially higher.

By Ariel Witulski, Guest Contributor, DailyFX.com

Follow Ariel on Twitter using @Ariel_Witulski

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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