Czech Koruna, The World's Worst Performing Currency

What’s the worst performing currency so far in 2015?

Not the oil-soaked Norwegian krone, or even the crisis-hit Russian ruble. Nor the swooning euro or sterling. All have been pipped to the New Year’s wooden spoon by a perhaps surprising candidate: the usually dull Czech koruna.

The currency weakened by 1% against the euro on Monday following some disappointing retail sales data from the Czech Republic, taking its losses for the year so far to 2.7%. The prospect of further easing from the European Central Bank is dragging down the euro side of the equation here, but against the dollar, no currency has fared worse in 2015 than the koruna’s 5.4% loss.

The drop highlights the spillover effects of the eurozone’s deflationary slide on economies—including the Czech Republic—that are closely intertwined with the currency bloc.

But the extent to which the Czech economy has caught the eurozone’s cold has surprised many investors, said Bernd Berg, an emerging-market strategist at Societe Generale.

Czech inflation in December came in at just 0.1%, far below the Czech National Bank’s target of 2%.

So what can the central bank do next? Cutting rates is off the menu. Benchmark interest rates already stand at a measly 0.05%.

Weakening the currency is the only obvious answer. Already, the central bank pins the koruna at weak levels. Since November 2013, the CNB has capped the currency at 27 to the euro to stop it strengthening too much against the crisis-hit single currency (stronger currencies make exports less attractive to overseas buyers, which slows down inflation). It has bobbed along close to that level ever since, before suddenly lurching lower in the last few days to hit 28.5 Monday (a higher EUR/CZK rate means a weaker koruna).

The market already seems to be anticipating a further move for the central bank's cap , which could come as soon as the CNB’s Feb. 5 meeting. “They have exhausted other tools like interest rates,” Mr. Berg said.

The Czech economy isn’t the only one closely linked to euroland: the Polish zloty and Hungarian forint have also weakened alongside the euro in anticipation of further ECB easing. But unlike the CNB, the central banks in those countries both have room to cut interest rates.