The koruna traded sideways during the week, depending on swings on the global markets. The Czech currency finally weakened but the losses are not very big. All the CE currencies showed some resilience to the fast-worsening situation in the world.
Major equity markets started falling significantly, mainly on recovery concern. After several bad figures from the US economy, the Fed boosted the concern with a more dovish statement after the FOMC meeting. The Fed said that recovery is likely to be “more modest” than had been anticipated. Principal payments on mortgage Fed holdings will be reinvested into long-term Treasury securities, which will prevent the central bank’s balance sheet from shrinking and will thus sustain the level of support provided to the economy. However, markets did not found this sufficient to bolster growth.
Also Chinese data showed a slowdown in economic activity, although the figures remain very high. On the other hand, recent European macro data were good. German 2Q GDP growth came out far ahead of estimates and improved the Eurozone GDP growth too. However, this had only limited positive impact on markets. GDP as a lagging indicator could not provide significant boost as markets were rather focusing on the weak Italian bond auction and worse-than-expected US retail sales.
In the previous weeks, markets appeared to be unconcerned about the European debt problems. But the issue starts weighing on the sentiment again. Spreads have widened between Italian, Spanish and Greek bonds on the one side and German bonds on the other side.
The Eurodollar got under heavy pressure as risk aversion increased and started playing key role on the market again, driving the pair significantly lower. The growth concerns are still mainly about the US and partly about China. However, there also is a risk that Europe will slow down due to both worse external demand and necessary austerity measures. It seems that this risk starts materializing, which is clearly negative for the euro. On the other side, the dollar is well bid thanks to demand for safety and unwinding carry trades. The demand is probably even boosted by a threat that Japanese central bank will intervene against the other “safe currency” - the yen.
Czech GDP was touch better than estimates in 2Q, which could not bring the koruna any gains. Contrary, it might be seen a bit disappointing after the very good German figures. Other Czech data came out completely in line with estimates and were uninspiring for the market. We expect the same from the next week’s PPI. On Tuesday, Standard & Poor’s revised outlook of the Czech rating to positive from neutral thanks to promising program of the new government. This improved slightly the koruna’s recent performance.
Soft indicators from the US industry and the German ZEW index are the most important incoming data. Both the NY Empire and Philadelphia Fed indices are expected to rebound after the previous deep fall, while the ZEW should decrease further.
The koruna shows some resilience but it will be influenced by the sentiment on the global markets. It will depend on recovery concern. If markets focus more on Europe’s growth outlook, the CE currencies may be hit. German data therefore represent a risk.