Investing mistakes in a few graphs

Forecasting business is hard
Don't always trust the experts, stay nimble and open minded or stick to a robust back-tested process
GDP and monetary policy forecasters get it wrong more than not

Investing is a long term game, stay invested and...

Miss the 10 best days and returns falter

...diversified

Miss the 10 best stocks and your returns suffer an average of 4%

Source AQR

The average investor is poor at timing markets

Green line shows index weighted by investors inflows/outflows, clearly average investors tactical moves hurt them

Risk Management matters

Watch your drawdowns (DD) and ask for Returns/MaxDD stats when you invest with a fund.
Have a clear risk management system, it is really hard to come back from a nasty drawdown

CZK...and the Peg goes

CNB finally let the EURCZK peg go allowing the currency to float below the 27 EURCZK floor.

The CNB had started intervening in FX markets on November 2013 to weaken the CZK to avoid a liquidity trap and a deflationary environment.
By 2017 the CNB Euro reserves had increased by 50bn.

Late 2016, as the inflation target (2%) was reached, the CNB announced it would end the peg sometime past Q1 2017.
Sticking to its promise the CZK is now floating again.

The appreciation after the first day of trading post peg has been orderly with a 1.7% gain, the most of EM currencies but in contrast to the Swiss experience when the Franc surged 29% intraday vs the Euro in January 2015 when the SNB surprised the markets.

Something to be said about transparency and preparing markets!
It is estimated that speculators have accumulated more than 60Bn in bets against the currency pair (short EUR vs CZK). This means the road to fair value will be bumpy.

The CNB also reserves the right to intervene when necessary : "The CNB stands ready to use its instruments to mitigate potential excessive exchange rate fluctuations if needed".

Now let's try to understand what is fair value and where the floating currency should settle at over the medium term?

• BoA Compass model estimates fair value closer to 24
• PPP (Purchasing power parity my least favorite indicator) implies EURCZK anywhere between 19 and 25!
• REER (Real effective exchange rate) model shows EURCZK undervalued (Z-score -1)

• CZK vs a correlated eastern block basket also suggest sub 24 fair value (ok not as robust as z-scoring index but graph good enough for our purpose)

• Finally a model using macro differential variables suggests a EURCZK between 24.9/25.25

The model is built on estimating long term weights from Q1 2000 to December 2013  (up to the peg)  and estimating EURCZK up to Q1 2017.

Pre Peg, EURCZK was trading around 25.5, below is EURCZK (orange) and BIS NEER model (white)

All in all over the medium term the EURCZK could appreciate another 5% to 25.25.

Again keep in mind that volatility will pick up and positioning is already massively long the local currency. That said the downside is probably also limited if the economic recovery remains strong. The CNB could also intervene the other way around, unloading its Euros if CZK depreciates too much (towards 28).

Rate hikes priced in are barely 30bps for 2018, so some room to price in closer to 75bps if the pace of the economy continues
Carry (Long CZK/Short EUR) is positive about 2bps a quarter for now.
ADV (Average Daily Volumes) are about 7bn USD equivalent, ranking 28th currency in terms of turnover according to the BIS (less liquid than most).