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Thursday, November 07, 2013 7:23 PM

Czech Republic Enters Currency Debasement Club; Koruna Intervention Triggers Record Drop; "Hardball" in Pictures

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Currency madness has spread to the Czech Republic. Central bank intervention triggered a record plunge in the Koruna vs. the Euro.

Bloomberg reports Czechs Play Koruna Hardball as Intervention Triggers Record Drop

The Czech central bank’s return to currency interventions after 11 years heralds a push for a weaker koruna to ward off deflation and kick-start the economy.

The koruna plunged 4.4 percent to 26.982 against the euro yesterday, its biggest-ever drop and the most in the world on the day, after the central bank sold the currency in the foreign-exchange market. Governor Miroslav Singer pledged to keep intervening “for as long as needed” to spur inflation, setting a target of “near” 27 per euro, a level the koruna last traded at in 2009.

“The central bank signaled willingness to play hardball in its foreign-exchange policy,” Luis Costa, an emerging-market strategist at Citigroup Inc., said by e-mail from London. “For the moment, I believe the ‘ideal level of 27’ will be met.”

Unlike interventions aimed at strengthening the exchange rate, which require sales of foreign currencies that can deplete foreign reserves, the Czech central bank is printing more koruna to drive down its value. The money supply increase may lead to the higher inflation rates that Singer is pursuing.

“The power is unlimited,” Guillaume Tresca, a Paris-based strategist at Credit Agricole SA, wrote by e-mail yesterday. “They can theoretically print as much koruna as they want.”
Hardball in Pictures - Koruna vs. Euro

It seems the "ideal" level of 27 was reached in a day. Of course it is preposterous to propose that anyone, especially central banks have any notion of what the "ideal" level is.

From a consumer standpoint, the more European goods Czech citizens can buy with the Koruna the better. But central banks will have none of that.

About That Eurozone Entry

Wikipedia comments on the Czech Republic Plans to Join the Eurozone.
The Czech Republic planned to adopt the euro in 2012, but its government suspended that plan in 2007. Although the country is economically well positioned to adopt the euro, there is considerable opposition to the move within the Czech Republic. According to a survey conducted in January 2011, only 22% of the Czech population was in favour of replacing the koruna with euro.
One alleged disadvantage of joining the eurozone is giving up the ability to do what the Czech Republic just did.

Of course the ECB is on its own currency debasement mission vs. the US dollar and Japanese Yen as noted in ECB Unexpectedly Cuts Rate to .25%; Draghi Promises Loose Policy for "Extended Period", "Ready to Consider All Instruments"; What Debasement is Next?

Where Does It End?

For years, I have been asking supporters of these competitive currency debasement schemes "where does it end"?

  • The euro monetarists want a weaker euro vs. the dollar, the yen, and the koruna.
  • The koruna monetarists want a weaker koruna vs. the euro, the dollar and the yen.
  • The dollar monetarists don't much care about the euro, but they do want a lower dollar vs. the euro and the yen.

Recently, Ambrose Evans-Pritchard at the Telegraph proposed the ECB devalue the Euro to support growth and end deflation.

For further details, please consider Lunatic Howls for Competitive QE Debasement; Another Swan Dive Into Cesspool of Economic Silliness; Following Lemmings Over The Cliff; It's Madness!

How the hell can competitive devaluation work, when every country can "theoretically print as much currency as it wants" and every country wants a declining currency vs. every other currency to support growth?

Ambrose, I am still waiting for the answer to that question.

Given that Ambrose (and every other misguided monetarist on the planet) proposes a mathematical impossibility, I may be waiting for a long time.

Mike "Mish" Shedlock

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