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Might Dividends Stir Up the Czech Koruna?
Thu, May 22 2008, 13:26 GMT
by KBC Market Research Desk
In early 2008, the Czech koruna steamed ahead against the euro and continued its rally that in fact started in July 2007. The koruna has strengthened since more than 10%. Now, we feel that correction time is approaching. A strengthening of the dollar, but also the outflow of dividends may be the triggers for such a negative koruna correction. We estimate that this year’s dividend outflow will approach CZK 130 bn (see Box 1).
Starting with the dividend outflow argument, we do not believe the often claimed assessment that the seasonal dividend season automatically translates itself in negative pressures on the koruna during the summer. Although dividends are approved and formally transferred in the summer, we believe that many large enterprises regularly hedge dividends in the forex market. The seasonal factor is also not confirmed by an analysis of the previous developments in the real and nominal EUR/CZK exchange rate (see Box 2). What does the analysis indicate? Dividends as a whole will have a negative impact on the Czech koruna, but not necessarily in the summer when they are approved and formally transferred.
It this respect it is important to know when foreign owners hedge their dividends. Given the long-term appreciation trend of the Czech currency, they are trying to hit the moments when the koruna has strengthened rapidly and is set for a temporary negative correction. So they will start buying euros when a negative correction draws their attention and as such the dividend argument will only exacerbate the negative correction once it has started. This may also be the scenario for this year’s negative correction, which, we believe, will be triggered by a major appreciation of the dollar in global markets, and the outflow of dividends may only make the correction more pronounced.
Published on Thu, May 22 2008, 13:32 GMT
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