Short the Czech Koruna for ‘Earth-Shattering’ Profits
Oct 21st, 2008 | By Jack Crooks | Category: US Dollar & Forex TradingCurrency expert Jack Crooks says this crisis is creating great trading opportunities in emerging markets. The Czech koruna soared 250% against the US dollar in the last seven years. But the greenback has found a bottom. And Jack says the reverse trend will be just as “earth shattering”. This is why shorting the koruna is a sure way to bag huge profits.
This from the Sovereign Society:
Again, it’s a problem of dependence. The Czech Republic is highly dependent on growth and financial market stability across the Eurozone. The major countries of Europe represent the key export markets and the financial institutions funneling foreign direct investment into central European countries. But now, both growth and financial stability in the Eurozone are being turned upside down, shaken, and dropped on their heads.
The needier countries of central Europe have benefited mightily from cross-border investment. As big players in Europe carried the region to greener pastures, the Czech Republic put a great deal of confidence in Europe’s financial system. Too much confidence, in fact.
Foreign banking institutions control an estimated 60-80% of all banking sector assets in the CR. But now – almost tragically – these foreign-oriented banks are scrambling to stay afloat. Credit in the financial system is evaporating in a hurry. And, in turn, so is the economy.
Concrete evidence that the Czech Republic is already flying off the tracks remains to be seen. And even though we can’t yet point to anything “wrong” with the CR economy – things like sky-high unemployment, runaway inflation, massive deficits, etc. – we can look to the future. And that’s where the outlook gets nasty.
Sure the Czech Republic has been a real star in Central Europe, as the government is privatizing and cutting taxes. But don’t be fooled – that star has already begun to fade… and fast. Economic growth is tapering off rapidly from its plateau two years ago. GDP growth touched nearly 7% in 2006. Now it’s got a date with 4%…and very easily could be less than that.
Czech Republic GDP Growth Is Slowing
Source: KBC
CRs current account deficit will surely increase as foreign direct investment fades and exports feel the crunch that’s bringing the rest of Europe to its knees. Unfortunately for CR, domestic demand simply isn’t sturdy enough on its own to sustain levels of GDP we’ve become accustomed to seeing out of CR the last few years.
And that’s just the economic gloom peeking over the horizon. It gets worse when you consider the potential for a geopolitical storm set to blanket the country…
Geopolitical Risk Is Bad for Currencies
A lot of issues may be running through our heads amidst the economic turmoil and chaos leading up to the November U.S. Presidential election. But it helps to understand that the political climate across the European continent isn’t exactly peachy. And the rising pressures between Russia and NATO have the potential to turn very sour, very quickly.
As has been the case throughout history, Central Europe can become a buffer zone between Russia and Western Europe in the blink of an eye. Favorable economic positioning? I think not. This certainly makes for an unattractive investment destination.
Competing factions within the Czech government are concerned about aligning too closely with the U.S., and becoming its “defense shield” in this dispute. Tension is most certainly brewing. And this geopolitical instability in the region comes at a time when economic concerns require everyone’s full attention. A resurgent Russia is a wet blanket to the vital foreign direct investment flow on which the Czech Republic – and Central Europe in general – so highly depend.
There are plenty of financial victims these days. In this particular instance the Czech koruna is the victim. In the CR, economic growth is applying the brakes, country finance and foreign direct investment are set to deteriorate quickly, and geopolitical risks are rising. That’s a miserable combination for any country’s currency.
Shorting the Koruna:
Like Riding the Euro Downward, But Only Twice as FastThe reality is that Central European currencies in general are very much a euro story.
There’s no getting around that, especially at this point in the global economic cycle. As the euro goes, so goes the Czech koruna.
The difference is this: The koruna moves up and down more than twice as fast as the euro when you compare each against the U.S. dollar. In other words, it’s like Wrigley’s Doublemint gum – double your pleasure, double your fun…
And double your profit potential while you’re at it!Since 2000, the Koruna Has Soared Against the U.S. Dollar.
Now It’s About to Reverse with a Vengeance!
In the chart above, the Koruna-USD pair is quoted in koruna so the falling line in the chart means it took less koruna to buy a U.S. Dollar. That is, the falling line is the same as the U.S. Dollar falling against the koruna. Now that’s reversing and the dollar is rising vs. the koruna. We believe the U.S. dollar has bottomed versus the euro. And a dollar bull market rally (euro bear market decline) is now underway. If you’re ready to hop on board at the beginning of an earth-shattering trend, you can look past the euro. It will be even more profitable for you to ride the Czech koruna lower against the dollar.
Those holding Czech koruna during the dollar’s seven-plus year bear market took a 250% rocket ride higher. A lot could happen in seven years, sure, but we say now’s the time to get positioned and stay positioned.
Our one koruna trade so far is up approximately 940% in just under two months. We expect many more opportunities for profitable trades as this currency’s long-term down trend intensifies.
Source: Capitalism on the Ropes!
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Jack Crooks is editor of World Currency Options, and a contributor to the World Currency Watch blog. Jack is a seasoned investment adviser, who has held key positions in brokerage, money management, trading, and research. He is the founder of Black Swan Capital, a currency advisory and management firm, and of Ross International Asset Management.
I’ve lost a lot by not caring about the right currency but I still think that your expectations are silly.
You have already missed the opportunity to short CZK. All risky things got cheaper by 40% or more in USD, for a few months, since August. We should have shorted them in August. But now it’s already too late and get ready for the ride in the opposite direction than you say. The Czech crown will never return to those low exchange rates from 2001. It used to be 44 CZK per USD but it will never be above 25 CZK per USD again. Get ready to revisit 15 CZK per USD in a year.
This development has good reasons. The crown was weak because we were emerging as a screwed post-socialist country. But we’re getting back to normal Europe where we belonged before the WWII. So a good working hypothesis is a homogenization with Germany – we used to have the same GDP per capita as Germany before the war and there’s no reason not to return to this expectation. Eventually, within a decade or two, the nominal salaries in the Czech Republic will be essentially identical to those in Germany. This will be partly because of wage inflation – which doesn’t seem to be visible in Czechia – and strengthening of the currency. The nominal wages are about 5 times lower than those in Germany. So don’t expect a significant weakening of CZK in a year or more (decade).
In the era of hysteria, one could bet against currencies with a lot of debt, like the forint, and even that was risky because of the possible interventions – but Czechia has a low external debt, about 4 months of GDP or so, twice or thrice smaller than countries like the U.S. Also, we largely ignore the “crisis”. You may be lucky by chance but I expect that your recommendations are likely to lead to losses for your readers.