The Czech National Bank's 3-1/2-year-old commitment to keep the crown weak, which has kept the euro trading above 27 Czech crowns, ended on Friday and some investors are betting the CNB's meeting on Thursday will be used to scrap the cap.
Though Thursday's meeting is not scheduled to be on monetary policy, the central bank can decide to change the agenda. The bank meets every Thursday, but with next week's meeting coming a day before the Good Friday holiday, this week's was being eyed for a policy shift.
As this graphic http://reut.rs/2o28tpF shows, euro/Czech crown overnight implied volatility, derived from an option that covers the next 24 hours, hit a high of 6.6 percent according to Reuters data, its highest since Britain's shock vote to leave the European Union last June, before pulling back to 5.1 percent.
One-month implied volatility has also jumped this week, reaching 5.975 percent for the third day running on Wednesday, its highest since the aftermath of the Swiss National Bank's decision to remove its currency cap in January 2015.
Petr Krpata, ING's chief currency strategist in London, said it was unusual for the longer-dated implied volatility options to be trading lower than the short-dated implied volatility options and that this was a sign investors were expecting near-term volatility.
"Under normal circumstances the shape of the vol curve is upward-sloping, because in the future you tend to have bigger uncertainty," he said, adding that short-term implied volatility was likely to trade even higher after the cap is removed.
"After the exit (from the cap), the uncertainty will be near-term, because while most of us agree that the cross will somehow normalise in the next few months, initially, who knows? The positioning is getting crazy now."
Krpata and traders, however, said crown moves in the aftermath of the cap's removal were unlikely to be anything like the Swiss franc's dramatic surge in 2015, with spillover into other markets likely to be limited.
"The key difference is that the SNB was an unknown unknown – you didn’t know it was coming," he said. "In this case, you are unsure of when, but you know it is coming."
ING estimates interventions in March might have reached more than 18 billion euros, surpassing the record 14.5 billion euros bought in January. A third of last month's interventions were probably carried out just last week in the run-up to Thursday's CNB policy meeting, ING said.
Intervention volumes so far this year have exceeded the last three years combined.
The CNB could also call an extraordinary meeting on another day of the week, but strategists said that was less likely.
"We anticipate the likeliest dates for the CNB to end the FX floor to be either on Thursday 6 April or Thursday 20 April," wrote Societe Generale strategists in a research note on Tuesday, adding that the latest they saw the cap being lifted was May 4.
Others take a different view. Stephen Gallo, currency strategist with BMO Capital Markets in London, said it was unlikely the CNB would remove the cap before the French presidential election.
Some in the market say the euro could fall sharply if far-right anti-euro candidate Marine Le Pen wins.
"I suspect that they're watching very closely the events taking place in France though, ahead of the presidential elections (on April 23 and May 7). I doubt they'll remove it before we get a result there," Gallo said.
(Additional reporting by Jason Hovet in Prague and Ritvik Carvalho in London; Graphic by Nigel Stephenson; Editing by Alison Williams and Stephen Powell)
By Jemima Kelly