Final Word from Friday, July 13, 2007

The crown has gained more than 30 hellers this week against the euro, to Kč 28.30, turning what was a weakening currency into a sudden winner. Analysts attributed the turnaround to the unwinding of carry trades. Vladimír Pikora of Next Finance said that investors rushing for safety inevitably drove up the crown's value when cashing out of their risky interest-rate bets. This came just days after The Economist reported that, according to its Big Mac Index, the crown is undervalued against the dollar by 27%. Even if you take into account the fact that a Czech Big Mac is 9% smaller than its U.S. counterpart, the crown is still undervalued by 19%. Either the crown has to rise, the dollar has to fall, or McDonald's has to put up its Czech prices. Unlike ČEZ, McDonald's can't get away with fixing prices at arbitrary levels, so the crown, at least temporarily, is going to have to keep on sizzling.[Czech Republic differential electricity]


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