According to Record PLC, a London-based currency manager overseeing $31 billion, the Czech crown (CZK or Kč in Czech) may supplement (if not replace) the Swiss franc (CHF, Corporation Helvetia Franc) as the top safe haven currency:
Of course, the strengthening of CZK since 2000 has already been huge. The USD/CZK exchange rate went from the record high above CZK 44 per USD in 2000 or 2001 to the low point around 14.5 in 2008 (factor of 3 change: very bad for people like your humble correspondent) but it stabilized near 17 in recent years.
A CZK 50 (now: USD 3) coin
During the recent recession, the Czech crown was mindlessly treated as a risky form of investment (it dropped whenever people were more nervous) - a point I found crazy because the Czech economy has been immune against the financial risks - collapsing banks or other companies - and it is also going to be safe for some decades against the sovereign defaults - the public debt is 40% of the GDP.
The traders have learned a lesson and during the recent hysteria, the EUR/CZK exchange rate no longer reacts to the hysteria, at least not dramatically. But I still agree with Record PLC that it should react oppositely because CZK is a safer haven than EUR.
A comparison of the Swiss economy (7.5 million people) and the Czech economy (10.3 million people) may be helpful. Of course, the GDP per capita is much higher in Switzerland - main for obvious historical reasons. The PPP-based GDP per capita is $46,000 in Switzerland, way above the figure of $26,000 in Czechia.
A CZK 2,000 (USD 120) banknote.
However, the nominal GDP shows how CHF is overvalued and CZK is underpriced. It's 1.45 times higher than the PPP GDP in Switzerland, but 1.35 times lower than the PPP GDP in the Czech Republic. Clearly, 1.45 times 1.35 is almost exactly 2, so if all other things were equal, the Swiss franc would be overpriced relatively to the Czech crown by a factor of two.
Things are not quite equal but they're not that infinitely far. The public debt is 40% of GDP in both cases, unemployment is low, exports are somewhat larger than imports. CZ is producing motor vehicles, metallurgy, machinery and equipment, glass, beer, and weapons, among other things. CH is producing machinery, chemicals, Swiss watches, textiles, precision instruments, CO2 hot air into the bubbles in the Swiss cheese, and top quarks. And let's hope that the Higgs bosons and maybe superpartners will also be added to the mix soon. ;-)
Business partners of CH are Germany, Italy, France, and U.S.; in the CZ case, they are Germany, Slovakia, Poland, France, U.K., Italy, Austria etc.
Based on some observations what's happening with the trade deficits and surpluses when the exchange rates move, I am inclined to think that at least a 30% strengthening of CZK would lead to no substantial nation-wide problems - in fact, it would be viewed as a beneficial thing by most players in the Czech Republic. Czechia is an export-oriented economy but it also has to import lots of things (which is easier if these things look cheaper) and the labor itself (the added value) is still cheaper by a factor of 4 relatively to Germany despite the fact that the country is de facto a part of the greater German economy. For this reason, even the strengthening by a factor of 4 (assuming no differential growth in nominal salaries) can't really be excluded.
Bloomberg, Business Insider, San Francisco ChronicleWell, they eliminated other currencies whose financial systems suffer from large debt or other problems; and those that don't but the currencies are already overvalued "to the limit". (The much stronger CHF relatively to USD is an unpleasant detail for the Americans working at CERN.)
CNBC: Czech Republic, Switzerland of Eastern Europe (new!)
Bloomberg: Czech Market Is New Haven on Low Debt, Stable Koruna, CNBC Says (echo)
Of course, the strengthening of CZK since 2000 has already been huge. The USD/CZK exchange rate went from the record high above CZK 44 per USD in 2000 or 2001 to the low point around 14.5 in 2008 (factor of 3 change: very bad for people like your humble correspondent) but it stabilized near 17 in recent years.
A CZK 50 (now: USD 3) coin
During the recent recession, the Czech crown was mindlessly treated as a risky form of investment (it dropped whenever people were more nervous) - a point I found crazy because the Czech economy has been immune against the financial risks - collapsing banks or other companies - and it is also going to be safe for some decades against the sovereign defaults - the public debt is 40% of the GDP.
The traders have learned a lesson and during the recent hysteria, the EUR/CZK exchange rate no longer reacts to the hysteria, at least not dramatically. But I still agree with Record PLC that it should react oppositely because CZK is a safer haven than EUR.
A comparison of the Swiss economy (7.5 million people) and the Czech economy (10.3 million people) may be helpful. Of course, the GDP per capita is much higher in Switzerland - main for obvious historical reasons. The PPP-based GDP per capita is $46,000 in Switzerland, way above the figure of $26,000 in Czechia.
A CZK 2,000 (USD 120) banknote.
However, the nominal GDP shows how CHF is overvalued and CZK is underpriced. It's 1.45 times higher than the PPP GDP in Switzerland, but 1.35 times lower than the PPP GDP in the Czech Republic. Clearly, 1.45 times 1.35 is almost exactly 2, so if all other things were equal, the Swiss franc would be overpriced relatively to the Czech crown by a factor of two.
Things are not quite equal but they're not that infinitely far. The public debt is 40% of GDP in both cases, unemployment is low, exports are somewhat larger than imports. CZ is producing motor vehicles, metallurgy, machinery and equipment, glass, beer, and weapons, among other things. CH is producing machinery, chemicals, Swiss watches, textiles, precision instruments, CO2 hot air into the bubbles in the Swiss cheese, and top quarks. And let's hope that the Higgs bosons and maybe superpartners will also be added to the mix soon. ;-)
Business partners of CH are Germany, Italy, France, and U.S.; in the CZ case, they are Germany, Slovakia, Poland, France, U.K., Italy, Austria etc.
Based on some observations what's happening with the trade deficits and surpluses when the exchange rates move, I am inclined to think that at least a 30% strengthening of CZK would lead to no substantial nation-wide problems - in fact, it would be viewed as a beneficial thing by most players in the Czech Republic. Czechia is an export-oriented economy but it also has to import lots of things (which is easier if these things look cheaper) and the labor itself (the added value) is still cheaper by a factor of 4 relatively to Germany despite the fact that the country is de facto a part of the greater German economy. For this reason, even the strengthening by a factor of 4 (assuming no differential growth in nominal salaries) can't really be excluded.
Czech koruna as another Swiss franc
![Czech koruna as another Swiss franc]()
Reviewed by MCH
on
August 20, 2011
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