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Weekly CZK Report - QE3 discussion

Weekly CZK Report - QE3 discussion

2.9.2011 17:30
Autor: Tomáš Vlk, Patria Finance

The koruna was very resilient during most of the week, but gave up on Friday. The euro-koruna rate rose above 24.40. The losses were mainly driven by a surge in risk aversion, but local news also contributed.

Czech retail sales posted a second disappointment in a row. Once again they fell year-on-year, while a slow growth was expected. The figure tells about weakening domestic demand, which is bad news, because outlook for the foreign demand is worsening significantly, too. It is clear that a rate hike is not on the agenda at the moment and it shifts farther into 2012, which is negative for the koruna. Earlier in the week, PMI beat estimates, staying decently above the 50 point level. The figure had no impact on trading.

Key topic is the health of the major economies and the question, whether the Fed will announce another monetary stimulus. The importance of the stimulus, or QE3, changed the usual reaction of the euro-dollar to new US macro releases. In some cases, the dollar firmed after upbeat data, and vice versa. However, the effect of the QE3 expectations was muted by influence of changes in risk aversion. At the end, the euro has lost some ground to the dollar, which is in line with the increasing probability of further Fed monetary easing.

In the Eurozone, debt crisis still keeps attention. Finland and some other countries claim collateral for their loan to Greece, which brings more difficulties for the new rescue plan to be passed. Germans still repeat that they do not want a common European bond. Moreover, in her recent comment Chancellor Merkel has opposed rescue for countries that do not meet all the requirements. Greece will likely miss its fiscal target this year due to both deeper recession and bad implementation of fiscal measures, Greek press reported, adding that the EU and IMF have suspended their current mission. Furthermore, auction of Italy´s bonds was not very successful as it did not attract much demand.

The debt issue is still an important risk for the euro, although it has had only a minor influence on the market this week. We also see the ECB rates as a potentially important driver. As the Eurozone slowed to stagnation and faces a recession threat, outlook for the ECB rates moves significantly lower. Market consensus does not show two hikes in the next two quarters any more. Moreover, speculations may emerge about a rate cut, especially if economic data worsen further. This factor might weigh on the single currency next week, when the ECB monetary meeting is scheduled. Markets will also watch for more information about the ECB role in rescue of troubled Eurozone members and its interventions in bond markets.

In the US, President Obama will address a joint session of Congress next week, where he will tell on his plans to boost jobs and accelerate economic growth. The plans may include more short-term expenses, offset by a tighter policy in the future. Markets would likely be supported by such announcement. Fed´s Beige Book may have more influence than usual because of the QE3 discussion. The macro figures scheduled for next week are of a lower importance.

Czech calendar include several more releases. We see industrial output and the trade balance as the most important. They will indicate how much the slowing external demand weighs on the Czech industrial sector, which usually shows the economy direction. However, change in the monetary policy outlook is partly priced in and the new data should, therefore, have a limited impact on trading in the koruna.

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