Weekly CZK Report: Negative Impact of CNB Meeting

The only local event was the CNB monetary meeting. As expected, it did not bring any change of interest rates. But, the meeting had a negative impact on the koruna because of the following statement. The bank says that it sees upside risks for consumer inflation: higher commodity prices, outlook for interest rates abroad and the expected VAT hike in 2012. However, the risks for monetary-policy relevant inflation are considered as balanced and the projection still suggests the first rate hike to come at the end of the year. Before the meeting some central bankers made hawkish comments on rates but the meeting result was different. There was only one vote for higher rates, while the majority of 5 favored no change in policy. This outcome is negative for the koruna as it indicates that monetary tightening is not getting a wider support.

The CNB meeting was an important reason why the koruna underperformed its regional peers. Other currencies in the region strengthened supported by the major markets. At the beginning of the week air strike on Libya and another explosion in the Fukushima plant weighed on risk appetite. But the markets have quickly shrugged off the negative impact of these issues. The week was finally positive for riskier assets, improving conditions for the CE currencies.

The markets focused on Europe before an important EU Summit. Initially, the expectations about the Summit outcome were positive. But they worsened progressively because of rating downgrades and politics. Moody´s lowered rating of Spanish banks and Portugal saw its rating downgraded by S&P .

Moreover, Portugal PM (9600 CZK, 1,05%) has resigned in reaction to the Parliament refusal of more austerity measures. This will probably lead to early election. The country´s fiscal situation has worsened and an official application for external financial aid has become very likely. Furthermore, speculations emerged that Irish banks face problems with debt payment. Finally, the EU Summit confirmed foundation of the ESM, which was expected, but did not bring further measures as initially believed. The impact of the European events on equities was mixed and did not block their growth. The euro felt some negative influence but on the other hand, it was supported by the expected ECB rate hike. Recent comments by the ECB bankers confirmed that the hike will likely come in April.

Macro data were not very important for trading but this will change next week as there are the US labor market data and the ISM index in the calendar. In both cases the figures are expected to reach the strong previous month levels. Another important topic should remain the approaching ECB meeting. Libya, other Arab countries and Japan still represent a risk but seem not to be as closely watched as before.

In the Czech Republic, minutes from the last CNB meeting will be published but they should not bring any surprise. The koruna may feel a pressure of the dovish CNB stance compared with the hawkish ECB. The short-term trading will also be influenced by the global markets.