Take Profit On RUB/CZK With Eye On Reentry

FX Top Trades published on December 5, 2012, we suggested entering a RUB/CZK spot at 0.6246 and exiting at 0.6565. The rationales for the trade were intervention risks for the CZK loom, a fairly strong Russian economy, a hawkish Bank Rossii and a commencing global recovery. However, we have decided to take profit on our RUB/CZK trade, reflecting increased uncertainty regarding commodity prices. However, we would look to possibly re-enter if the oil price once again stabilises. Overall, we continue to see the Czech koruna softening and as such we still view it as an interesting funding currency for carry trades in the EM universe.

At The Time
When the trade was entered in December 2012, we expected RUB/CZK to climb over 0.6500 over a period of two-to-four months. The Czech central bank (CNB) exhausted standard monetary policy tools after it cut the key policy rate to a technical zero (0.05%) in November 2012. Russia’s central bank, Bank Rossii, has been set to closely examine consumer price inflation, aiming for a target within the 5-6% corridor. Our forecast that CPI would easily climb over 7% y/y in Q1 13 was realised when price increases were introduced in January 2013 and this resulted in Bank Rossii remaining hawkish. Tight monetary policy in Q1 13 was RUB positive. Together with the strong current account, the RUB longs looked attractive. As we expected, the seasonality effect pushed the USD/RUB below 30.00 exactly in late January-February 2013. Thus, Bank Rossii intervened to keep the RUB a bit weaker. Given the unexpected Cyprus deal in March, we saw the pair climbing to 0.6493 on a weaker EUR within our maturity recommendation, letting the profit to rise almost to 4%.

However, we were surprised by the decline in the oil price on a weaker-than-expected global performance as Chinese macro numbers were not good enough. The uncertainty of the Cyprus deal pushed investors out of the RUB assets, which strongly weighed on the Russian currency. Russian economic growth continued to slow in early 2013, taking January-February 2013 GDP growth to 0.9% y/y. The seasonally strong current account effect is fading as we go into Q2 13.

Going forward, we look to possibly re-enter if the oil price once again stabilises. Overall, we continue to see the Czech koruna softening and as such we still find it to be an interesting funding currency for carry trades in the EM universe.

Please see the table on the following page for an update on the performance of the 2013 FX Top Trades.

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