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Weekly CZK report: Greece and Rate Differentials

Weekly CZK report: Greece and Rate Differentials

23.05.2011 9:32
Autor: Tomáš Vlk, Patria Finance

The Czech currency has weakened progressively during the week and has settled around the 24.50 level to the euro. The koruna´s weekly performance lags behind its regional peers as the forint is finally flat and the zloty registers decent gains.

New data from the Czech economy were, theoretically, positive for the koruna, but were almost ignored. The current account posted a slight surplus, significantly above the negative market consensus. The result was not that surprising after the record trade-balance surplus had already been out, but still the figure was good. Also the PPI data were higher than expected on food and commodities. However, the faster growth of producer prices is unlikely to change monetary policy outlook as consumer prices are still increasing slowly. The recent central bankers´ comments have confirmed it. Both Lubomír Lízal and Mojmír Hampl said that they supported the bank´s projection, according to which the first rate hike should come in the 4Q.The comments may be seen as negative for the CZK as they prove that the hawkish wing is not getting a wider support in the board.

In the region forint was hit by the new government measures for banks. The government wants to extend banking tax also in 2013-2014, at one half of the current level. Furthermore, they plan to protect foreign-currency mortgage borrowers by capping the euro-forint and the franc-forint exchange rates used for repayments. The banks would also face other minor constraints. The plan is another non-standard intervention into free market and the first reaction of the forint was negative. But, the impact did not last too long. The market shrugged it off as other news was good, such as the very successful auctions of longer government bonds. In Poland some new central bankers´ comments and new data supported the view that interest rates will continue to rise. This is, however, not very surprising. 

Global markets focused on Greece as the Eurogroup and the IMF discussed options for this country. As usually, there is no unique voice from the EU about possible solution. Eurogroup´s chairman Jean-Claude Juncker was talking about potential extension of the Greek bond maturities or a “soft” restructuring of debt, and about more measures in Greece including further privatization. German chancellor Merkel, on the other hand, refused any debt restructuring before 2013. This idea is also opposed by the ECB that is holding a considerable part of the Greek debt on its books.

The issue weighed on the euro and is likely to influence it repeatedly because without another bailout, default of Greece is very likely. The low flexibility of the EU even increases the risk for the euro. This week, though, the market´s attention shifted partly back to the rate differential, which provided the single currency with some support. The soft indicators from the US industry slumped and indicated that monetary tightening might come even later that previously expected.

Next (2247 GBp, -0,09%) week, there are not many interesting points in the US calendar. The second release of the 1Q GDP and the durable goods orders probably will not have a big impact on expectations about interest rates. On the other hand, the European debt issue is still active and may hit markets any time. German Ifo index and Eurozone´s PMI may also have some short-term impact.

The direction of the global markets still has influence on the CE currencies, although the daily motion may not be much correlated. The koruna seems to be less influenced than its peers. We believe that the low Czech interest rates and their outlook may be behind as this may be a motivation for carry trades inside the region.

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