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Weekly CZK Report - Weak May Performance

Weekly CZK Report - Weak May Performance

30.5.2011 9:09
Autor: Tomáš Vlk, Patria Finance

The Czech currency has widened its May losses. Although the weakening is not very fast, the koruna has already lost nearly 2 pct during this month. The negative trend is common for all the CE currencies and corresponds with the retreating euro and the decreasing stocks on the major markets. In case of the Czech currency, we also see the interest rate outlook as one of the negative drivers.

This week no Czech data have been scheduled and we have not heard any interesting quotes on interest rates from the CNB. However, the last central bankers’ comments were quite dovish and also the negative signs from the Eurozone suggest that there is no need to lift Czech rates any time soon.

The koruna has kept its negative trend, although daily motion of the euro-dollar and shares was both ways. These markets though influence pace of the koruna weakening and its direction in a longer period. The recent weeks have brought such evidence.

Two main topics are driving the euro-dollar rate: European debt crisis and interest rate differential. The former is obviously negative for the euro, while the latter for the dollar. New information as well as switching market attention between the two topics is behind the euro-dollar volatility.

Currently, the euro has gained some ground against the greenback as the last US macro data disappointed, suggesting that no Fed tightening is yet on the horizon. The downward revision of personal consumption, a fall in the durable goods orders and another rise in jobless claims all indicate that no tightening is coming and even raise speculations about more quantitative easing. If the ISM and the labor market reports support such speculations, the dollar will likely be hit again.

On the other hand, the euro remains vulnerable to news about the debt crisis. Recently, the single currency has suffered short-term losses due to ratings, new comments and data.

Fitch has downgraded its rating for Greece and cut Belgium´s rating outlook to negative. S&P has put a negative outlook to the rating of Italy. ECB member Jürgen Stark warned against restructuring of the Greek debt that would be a catastrophe for the banking system. The restructuring is also opposed by German Chancellor Angela Merkel, Finance Minister Wolfgang Schäuble and by French President Nicolas Sarkozy. According to Jean-Claude Juncker, the head of Eurogroup, the IMF may not release another tranche of its aid for Greece, leaving the Eurozone carry the burden of bailout alone. Otmar Issing, the former ECB chief economist, is skeptical about Greece´s ability to meet its obligations, saying the country is insolvent, not just illiquid. EU commissioner Maria Damanaki said that Greece must undertake serious measures and reach an accord with creditors, or the country will have to return to the drachma.

These comments are a concern for the market as they show that there is no agreement on Greece and every solution is connected with serious problems. Moreover, in Greece and Spain public protests intensify against further austerity measures and the new macro data show that the economic recovery is likely fading. This is negative because of implications on the ECB policy, but not only that. Weaker economy also means more difficulties with reducing public deficits.

Next (2257,55 GBp, 0,94%) week will therefore be about the US macro data and about the Eurozone´s painful search for solution for Greece. For the koruna, the Czech data may also be of some importance because of the discussion about interest rates. We believe that they have only small chance to reverse the koruna´s slightly negative trend.


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