Koruna appreciation and capital unwind after the floor's exit

Ending the exchange-rate floor on April 6, 2017 was itself a delicate operation, because years of one-sided intervention had left foreign investors holding an enormous stock of short koruna positions built specifically to profit from the currency's eventual appreciation once the commitment lifted. Analysis presented in the BIS Papers series on the episode shows the CNB had to manage this overhang carefully, aware that a disorderly unwind could produce exactly the kind of sharp, destabilizing appreciation the original floor had been designed to avoid at the other extreme. In the event, the koruna strengthened in a comparatively orderly fashion through 2017 and 2018, moving back toward levels last seen before 2013 without the chaotic overshoot some analysts had warned of, helped by the gradual, telegraphed nature of the exit and continued domestic growth. The episode left the CNB with substantially larger foreign exchange reserves than it had held before 2013, a legacy balance-sheet effect of the floor years that still shows up in the central bank's financial statements and in the koruna's subsequent trading range today.