Czech crown in the era of coronavirus

Like all other currency pairs with the US dollar, so the Czech crown is experiencing hot moments and sharply weakened last week as it reached 26.10 crowns for the US dollar, where it last traded in January 2016. Against the euro, the crown got above 27 CZK.

In response to the current situation, the CNB Governor announced the readiness of the central bank for further rate cuts, which may already take place on Thursday, when another meeting is scheduled. After the last rate cut to 1.75% on March 16, 2020, the crown weakened strongly, but it still offers one of the highest interest rates in the region.

It is difficult to predict how much the central bank will reduce the interest rate again and how the czech crown will respond. In any case, the central banks of all countries have to deal with a similar situation, so it is possible that the market will take this into account and there will be no further sharp fall of the czech crown. According to our technical analysis, it seems that the crown has reached interesting levels, which might be a pitty to miss. So let's take a closer look at the USDCZK and the EURCZK.

The USDCZK as at March 22, 2020

First, let's see how the USDCZK currency pair looks on the weekly chart, see Figure 1.

Figure 1: The USDCZK on a weekly time frame.

The czech crown depreciated by 1800 pips last week. The price reached the long-term resistance zone at around 26 CZK. In the chart we can see that this zone  was already tested in December 2016 and since then the Czech crown  appreciated against the dollar. Who, after the rate cut last week, correctly guessed the next direction, could get on five microlots a profit 10 000 CZK. This potential for profit still exists, provided that the resistance will not break and the crown would strengthen to the previous levels.

On the daily chart, the situation looks like this:

Figure 2: The USDCZK on daily a time frame.

Bearish candlestick formed on March 20, 2020, which closed well below its opening price. It could indicate that further price increases may no longer continue. The candlestick also surpassed the low of previous candlestick with its lower wick.

So there are two moments: a strong resistance that has been tested once, and a bearish candlestick on a daily chart. For aggressive traders, the entry could be short, speculation on the decline. Conservative traders will probably want to wait for more signals, such as the bearish Cross of Death on the 1H timeframe when the EMA 50 falls below SMA 100. In this case the the price will already move some way down, but it will be more likely that the fall of the USDCZK will continue.

The EURCZK currency pair as at March 22, 2020

The EURCZK currency pair on the weekly time frame is shown in Figure 3:

Figure 3: The EURCZK on a weekly time frame

The price broke through the long-term resistance band, which is in the 27.00-27.20 zone. The CNB has maintained this band through interventions in the long term to prevent the crown from strengthening too much. Following the release of interventions in April 2017, the crown gradually strengthened.
Figure 4: The EURCZK on a daily time frame

The daily candlesticks created a very interesting situation. The last three candlesticks formed a strong reversal pattern so-called evening star. The last candlestick on March 20, 2020 is distinctly bearish and closed deeply below the previous candlestick, which formed the high of this pattern. The situation therefore seems to be a good opportunity for a speculation on a decline. And what do you think of this trading opportunity in the current context of further potential rate cuts? Will the technical analysis work or the fundamentals will prevail?

Finally, we want to remind readers that the current volatility on all currency pairs is extreme. Therefore, the distance of stop loss orders and trading volumes should be adjusted accordingly. Trade sensibly and do not risk more than 1% of capital per trade.

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