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Weekly CZK Report - Stable in volatile times

Weekly CZK Report - Stable in volatile times

12.8.2011 17:10
Autor: Tomáš Vlk, Patria Finance

Market volatility has even increased this week. The first days were influenced by the US rating downgrade by S&P . The ECB intervened on bond markets and the G7 pledged to act against instability, which had some short-lived positive impact. But then, wave of high risk aversion weighed heavily on the markets.

The Fed was hoped to support them with announcement of another round of quantitative easing. The FOMC meeting did not deliver exactly what markets hoped for. It said that the rates would stay extremely low for another two years and left the door open for more stimulation if needed. Assessment of economic performance was worse than previously. The more dovish stance helped to improve risk appetite, but the relief was only temporary and recession fear then returned.

The debt crisis is still an important influence. Market worries turned to France. Speculations emerged about a possible rating downgrade and about French banks´ liquidity position and their high exposure to sovereign debt of periphery Eurozone members. Then, major rating agencies confirmed the French rating, Societe Generale (23,9 EUR, 3,89%) refused the speculations about its health and the French government started preparing more savings. The markets changed direction again.

During the week, there were also other factors bringing more volatility. Swiss central bank fought the strong franc, intervening in the money market. The SNB bankers´ recent comments raised speculations about cutting interest rates below zero and about a possible peg to the euro. This led to a deep fall of the franc, having also some influence on the euro-dollar market.

Behind the market turmoil and very aggressive reactions to news, we see increasing threat of economic recession combined with worries that policymakers have no measures left to tackle the problem. On Friday, French GDP data brought another disappointment. The economy only stagnated in the 2Q. German and Eurozone GDP figures are scheduled next week and they may be awaited with worries, too. German Chancellor Merkel and French President Sarkozy will meet again and will likely want to support credibility of the Eurozone. They will probably concentrate on the debt issue.

From the US, last disappointment was the Uni. Michigan consumer confidence. The most important releases of next week should be NY Empire Manufacturing index and Philadelphia Fed index. Both indices have dived in recent months and boosted the market worries. That is why they should be very important for next week´s trading. Analysts predict a slight positive correction of the two indicators.

Data from the Czech real economy have worsened. Industrial production increased by 7.4 pct and exports by 9.6 pct year-on-year. The figures are significantly below the previous readings, although they remain quite good. After a drop in retail sales, this was also bad news. Unemployment slightly increased to 8.2 pct, as expected. The reason was seasonality. Also CPI figures were in line with estimates and did not change our view on interest rates. Next (2260 GBp, 2,54%) week the 2Q GDP will be the most interesting Czech release. A slowdown in q-o-q growth is expected, while y-o-y the economy should show still a decent expansion.

The koruna has marginally reacted to the local news. It has also been resilient to the turmoil on global markets and its weekly change is minimal. In August it has outperformed its regional peers that are weakening. The CZK is the least risky currency in the region and sometimes is bid when risk aversion is high. However, usually this is only short-lived as the koruna is not a typical safe haven asset. The euro-koruna rate has not get away from its range, currently at 24.00-24.30, and still has a good chance to stay there.

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