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Weekly CZK Report: Modest gains after holiday

Weekly CZK Report: Modest gains after holiday

8.7.2011 18:06
Autor: Tomáš Vlk, Patria Finance

This week has not brought any big swings in the koruna FX rate. Trading activity was muted by national holiday on Tuesday and Wednesday and the market was only little volatile. Some gains came in at the very end of the week.

The koruna almost ignored the latest macro news from the Czech economy. Overall, the data were very good. Retail sales increased by a modest 3.2 pct, roughly in line with estimates. The growth of consumer demand thus remains slow. However, industrial output accelerated significantly in May, as usual driven by car manufacturing, machinery and electronics. The 15.2 pct growth is far ahead estimates. Also export regained its pace and the trade balance showed higher surplus than expected. Better figures from German industry are good news for the Czech economy, too. Although there was almost no immediate reaction of the FX market, the koruna may benefit from the strong data in the next days, but may need an external trigger.

Next (2377 GBp, -1,37%) week the local inflation data will be quite interesting. The CNB rate hike is approaching and we see a good chance that it will come at the August meeting. The CPI is expected to surpass slightly the CNB target and will be an important input for decision about rates. Other data on the agenda, the unemployment rate and the current account balance, should not have big impact on trading.

After Greece approved more austerity, it will be granted funds for avoiding default in July. The Eurozone continues to prepare a longer-term rescue plan for the country. An involvement of private investors is still a problem. Although the major banks agree with the bond rollover, avoiding a credit event is still not guaranteed. Further tuning and discussion with the banks will be necessary. The issue weighed on the euro in the first days of the week. Then, attention focused on Portugal after its rating downgrade to junk by Moody´s. But the impact was not very big because the ECB stepped in and eased Portugal´s access to emergency funds. The bank suspended the requirement of minimum rating threshold for bonds accepted as collateral. At the meeting, the ECB also lifted its interest rates, but it was a widely expected step, neutral for the markets.

Some of the recent data from the US economy were very good, such as the ISM report and the ADP employment change. But on Friday, a disappointment came in from the labor market: payrolls well below expectations and a rise in unemployment. The euro-dollar rate went slightly up after the figures as worries about economic slowdown outweighed the effect of lower risk appetite. Influence on the koruna was minimal.

Next week Fed´s Chairman Bernanke delivers his semi-annual report about monetary policy to the Congress. The Fed´s assessment of the last economic data will be important for the markets. A key question is whether the central bankers still stick to their view that the rise of inflation and worsening of the economic data will be only short-lived. In the calendar there are also the US retail sales and NY Empire Manufacturing index.

China will publish its real economic data including the 2Q GDP release that is expected to be slightly below the previous reading. Recently, the Chinese central bank has raised interest rates once again and markets speculate whether more tightening will be needed this year. The data may bring another hint.

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