Last week, markets have watched closely European efforts to tackle debt crisis. Initially, they were little confident that European leaders will agree on a solution; no prepared draft was on the table and all comments were quite vague. However, optimism increased progressively, supported by German Chancellor Merkel and French President Sarkozy who met and reached a joint position before the EU summit. At the summit, the Eurozone leaders announced new aid for Greece worth 109 billion euros, including a EUR 37bn involvement of private sector. The EFSF was empowered to buy debt on secondary market, to make precautionary actions and to help to recapitalize banking sector. The ECB finally agreed that private investors will be involved, but said that national governments will have to bail out Greek banks instead of the ECB if country rating is cut to default. Fitch has already announced that Greek rating would be cut to “restricted default” should the rescue plan be implemented. Moreover, idea was raised about European rating agency and European monetary fund based on the current rescue mechanisms.
Risk appetite was supported by the outcome of the EU summit that gives a good chance to prevent further contagion of the periphery. The euro erased previous losses and surged above 1.44 against the dollar. Than it ran out of steam, hovered around that level at pared the gains the end of the week.
Macro data from the Eurozone were not supportive for the euro. All the German ZEW and Ifo indices and the PMI from the Eurozone came out below expectations, suggesting economic recovery to slow down. But, the figures had only a short-lived negative impact on the single currency. On the other side, Philadelphia Fed index was slightly better than estimates. Macro figures should play a more important role next week as there is the US GDP release on the agenda and the European debt crisis should not be the number one risk any more. Although the issue may come back in the future, markets will currently focus rather on risks for economic growth and on the US debt ceiling debate.
The koruna was resilient to the swings on global markets. Its weekly gains are marginal. No local macro data were scheduled. Two comments have recently come from the CNB. Kamil Janáček was hawkish, while Lubomír Lízal´s comment on monetary policy was dovish. This is not surprising given their previous words and voting on rates. We have shifted the expected timing of the first rate hike back to the 4Q because of the worse figures coming from the Eurozone and the lower local inflation figures. The central bankers’ comments did not have any significant impact. This week, the Czech calendar is empty.
The koruna has lagged behind its regional peers, but it is due to its overall lower volatility. Year to date the Czech currency performs slightly worse than the forint but better than the zloty. The koruna still has potential to strengthen in a longer term. It may gain about 1.5 pct against the euro by the end of the year.