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Weekly CZK Report: Waiting for CNB after Fed Had No Impact

Weekly CZK Report: Waiting for CNB after Fed Had No Impact

2.5.2011 15:18
Autor: Tomáš Vlk, Patria Finance

This week was a calmer one on the EUR/CZK market. The Czech currency tried to approach the 24.00 several times but was always pushed back. Situation has been similar on all the CE currencies; they finish almost flat and their daily volatility was not significant.

No Czech macro data were released during the week, so we are waiting for another monetary meeting of the CNB that is scheduled for next Thursday. Our expectation has not changed – interest rates should remain unchanged. Recently, the new MPC member Lubomír Lízal revealed that he is one of the doves in the central bank. According to him, current interest rates are not a problem. He sees no major consequences if the rates stay on hold. Overall, we can identify two to three hawks in the MPC, which indicates that higher rates should not get enough votes.

The Czech government survived a non-confidence vote. It was not surprising as the coalition parties decided to stay in the government and there were only a few dissenters. The politics has only marginal influence on trading, if any.

The Fed meeting was the most important event of the week. The key message is that monetary stimulation continues. Fed´s outlook for GDP growth has been lowered for this year, while inflation outlook has risen. Theoretically these are opposite signals for monetary policy. However, chairman Bernanke made it clear that the risks for growth are priority, while the commodity-driven inflation is considered to be temporary.

The rates will therefore stay low for an extended period of time and the QE2 program will continue as planned. Moreover, the money from maturing bonds will be reinvested, which will prevent the Fed balance from shrinking. Some Fed representatives were quite hawkish in their comments in the past weeks. But the meeting has showed that officially the Fed is not becoming more hawkish and still prefers to stimulate economic activity. The event thus boosted riskier assets, while it weighed on the dollar on the other hand. The greenback lost more ground to the rallying euro. The US GDP expanded less than expected in the 1Q and had some short-term impact on trading, but did not help the dollar to pare its losses. Although these events were important for the global markets, they were nearly ignored by the CE currencies.

Monetary policy should remain a very important topic for the euro-dollar market. Next (2237 GBp, 0,54%) week, the ECB will decide on rates; this time a pause in tightening is expected. The bank decided to fight inflation but its policy may hurt the troubled countries. Market still focuses on the first part and the difference between the ECB and the Fed stance, which is positive for the euro. There are also the important US nonfarm payrolls in the calendar. They may influence the currencies through risk aversion, and potentially through expectations about the Fed policy.

The CNB meeting may influence the koruna as we are entering a period when the rates may start to rise. The question is timing. As long as the Czech rates remain low, the koruna may find hard to benefit from positive mood on the major markets. On the other hand, it still shows resilience to negative influence.
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