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Weekly CZK Report - Region under pressure of risk aversion

Weekly CZK Report - Region under pressure of risk aversion

27.6.2011 9:34
Autor: Tomáš Vlk, Patria Finance

During June, the Czech koruna made several attempts to break below the 24.00 mark, but always failed. This week, the rate was pushed higher as risk aversion weighed on the region. The koruna pared the previous gains, but still has kept better performance than its regional peers.

The major negative factor is still Greece. Work on a rescue plan continues, but there remain serious risks that may lead to a failure. The country should avoid a default in July thanks to another tranche of the EU/IMF loan. The new Greek government has already won a confidence vote in the Parliament and prepared a new austerity package. The last condition before the money is paid out, is approval in the Greek Parliament. It seems that the package will get it despite the opposition and the general strike. Another task is to prepare a five-year rescue program. The EU summit agreed that it want the rescue and some progress has already been made. But, some hurdles remain. One of the most important is the involvement of private investors. The key Eurozone members want to include a voluntary bond rollover, while Fitch has recently said that it would be considered a default of Greece.

Although there was some promising news about Greece during the week, uncertainty persists, which weighs on the risk appetite. Next (2282 GBp, 0,00%) week, markets will wait for the vote about the austerity package. If successfully passed, the worries may be tempered, which would give the euro a short-term boost.

Another source of risk aversion this week was macro releases. The German ZEW survey, the Eurozone PMI and industrial orders came in worse than expected. The Fed meeting also hit the riskier assets, while it boosted the dollar. The decision about interest rates was not surprising; the rates are expected to stay on hold for a long time yet. Chairman Bernanke said that the economic recovery was progressing more slowly than expected, but indicated that the situation is not bad enough for another quantitative easing. The Fed projections for GDP were revised down. At the end of the week, German Ifo index and US durable goods orders beat slightly the estimates, but had only minor effect on the markets.

The most important Czech event was the CNB monetary meeting. The interest rates were left unchanged. In a repeat of last meeting, two Board members opposed, voting for a 25 bps hike. The rate decision was in line with expectations and the statement did not surprise. The meeting outcome was, therefore, neutral for the koruna. We still expect that the CNB will start a tightening cycle in the 3Q - at one of the following meetings. However, the recent macro data from the western economies have brought some negative surprises. If it is not just a short-lived worsening, the pace of the ECB tightening may slow down. This poses also a risk for the Czech rate hike that might, in that case, come somewhat later.

Next week, the Czech calendar will be nearly empty. The PMI should not influence the market. The koruna will stay focused on Greece that remains far more important for trading than any local issue. Also macro data will attract attention, especially the US ISM report that will bring new information about the worsening economic prospects.

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