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Weekly CZK Report: Flat after ECB Hike

Weekly CZK Report: Flat after ECB Hike

11.4.2011 9:39
Autor: Tomáš Vlk, Patria Finance

The koruna is flat after the week. Although the recent releases and news were interesting, they did not give trading significant impetus. The currency did not particularly react to the Czech data that, overall, were quite good. Retail sales surprised with another strong growth over 6 pct. The figure was driven by car sales. Also the unemployment rate was a nice surprise as it dropped to 9.2 pct, more than expected. Positive seasonal factors were involved but the release also gave evidence that the situation on labor market is improving thanks to the rising economic activity. Industrial production was slightly worse than estimates but its double-digit growth is still relatively high. The same holds for foreign trade. The surplus came out slightly below consensus and the turnover growth did not reach the previous levels. But still, the figures cannot be considered as bad.

The latest macro releases did not change the expectations on the monetary policy. During the week, CNB member Kamil Janáček said he was ready to vote for rate hike at the next monetary meeting. On the other hand, vice governor Mojmír Hampl said that his view on the economy had not changed in the last month. The comments indicate that there are some hawks in the Monetary Council, but their view has probably not yet prevailed. We still expect the first hike to come in the 3Q.

The Czech politics has experienced another turmoil due to a corruption scandal in one of the coalition parties (VV). It will probably weaken the coalition position in the Parliament, which might threaten the planned reforms. It would be negative for the economic outlook but now it seems that markets ignore the event.

The ECB monetary meeting was one of the top events of the week. The rates were lifted by 25 pp as expected. ECB President Trichet did not mention that the rates are on appropriate level. On the other hand, he stressed that the bank did not decide that the hike was the beginning of a series. This rhetoric suggests that further tightening is likely to come during the year. But as the key phrase about “vigilance” was left out, the hike will probably not come immediately at the next meeting. The ECB did not surprise the market and only increased volatility on the euro-dollar market directly after the rate decision. However the euro then surged above the 1.44 mark supported by the rate expectations as well as by the unresolved US budget issues.

Portugal has finally requested financial aid from the EU and IMF. The step had become very likely as the market pressure increased significantly. For the euro the bid for financial aid was not negative as it was expected and it actually decreases uncertainty.

Despite the euro rally the koruna remained little changed. The ECB hike widened the interest differential, which is theoretically negative for the koruna. But on the other hand, it was expected and the CNB tightening is also approaching. 

This week, the Czech inflation data will be interesting; they may influence the rate expectations. Inflation becomes more important across the globe. After the ECB meeting, attention will fully focus on the Fed. Both the US CPI and PPI releases should therefore be quite important, besides the retail sales, consumer confidence and the NY Empire Manufacturing index. In the European calendar there is only the German ZEW index, while China will publish its monthly set of data that may have a short-term impact on the markets.

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