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Weekly CZK Report - Holding Position

Weekly CZK Report - Holding Position

6.8.2010 17:50
Autor: Tomáš Vlk, Patria Finance

The Czech currency was somewhat cautious before the Czech central bank meeting but the outcome finally did not bring any special surprise. The bank decided to keep interest rates on hold, as expected. The vote was unanimous. After the koruna had firmed significantly, some verbal intervention was likely: Governor Singer said that the koruna level was “not a big drama” but the pace of strengthening was too fast. If the currency continues to firm so fast, the central bank might need to react, Singer said.

Such comment was potentially negative for the koruna but had no big impact after all. At the same time, the CNB published new staff projections suggesting faster GDP growth and faster appreciation of the koruna. The projection for 2011 was revised to 24.30 from 24.90.

New Czech macro data showed the consumer demand in a better shape than expected. Retail sales surprised on the upside, posting a strong 6.6 pct growth. Consumer demand may contribute positively to the 2Q GDP, together with foreign trade that remains the key driver of the economic recovery. Growth of industrial output remains strong, the June data were in line with expectations. Surplus of trade balance was lower than expected in June. However, this was caused by an impressive surge of imports, which gives another evidence of reviving domestic demand. In total, the Czech macro data were good but reaction of the koruna was marginal.

The koruna is little changed after the week. It was holding position, defending its previous gains. The daily moves were driven by swings on global equity markets.

The Eurodollar did not have a significant impact as it stopped following changes in the risk appetite. The pair focused on economic news. Currently, the data coming from Europe are very good, including both macro data and company results. The US indicators, on the other hand, pose questions about strength of the economic recovery. The latest data from the US labor market were worse than expected. Speculations about further monetary easing therefore intensify and the dollar is under pressure. The issue is even more important for trading as the Fed has its meeting scheduled to next week. Swings of the risk appetite have only minor impact.

However, we see the euro vulnerable to the austerity measures. Market now ignores this issue as data from the real economy are very good. But the spending cuts may weigh on economic growth in the second half of the year and may also lead to downward revisions of projections for 2011. When such indications come, the current euro rally may quickly be over.

The koruna will likely follow rather equities than the Eurodollar. Next (2045 GBp, 1,54%) week’s European data like the 2Q GDP may support the demand for riskier assets. After the recent bad news from the US economy, the Fed may come with a dovish comment, which also would be positive. On the other hand, US retail sales and consumer confidence will be awaited with worries. Czech macro events, as usually, will not be an important driver.


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