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Weekly CZK Report - ECB liquidity plan

Weekly CZK Report - ECB liquidity plan

16.9.2011 18:45
Autor: Tomáš Vlk, Patria Finance

The koruna was traded around 24.50 against the euro this week. It was somewhat weaker in the first days because of the market stress, but then went back. The currency did not show any reaction to local news and was also resilient to influence from global markets.

The current account posted a deficit that was significantly smaller than consensus. But trade balance had already been released and was better than predicted. Real market expectations about the C/A, therefore, shifted upward and the final result was not very surprising. The PPI was completely in line with estimates and thus neutral for trading. The producer prices slightly decreased month-on-month, driven by commodity prices. Although the yearly inflation remains elevated, it will not lead to monetary tightening.

Downside risks for inflation prevail as the Czech economy is likely to follow the downturn in major economies and commodity prices have eased. Recently, some interesting comments on this have come from the CNB. Vice governor Mojmír Hampl stressed the risks that may push inflation lower and even mentioned a possible rate cut, if they intensify. Another CNB member, Kamil Janáček, made a neutral comment and emphasized that outlook is becoming very hazy. Janáček previously supported higher rates and the change in his stance confirms that the expected path of interest rates has lowered. This is negative for the koruna, but no big reaction was seen as the change in outlook was already priced in.

The CNB decides on interest rates next week. A rate hike is unlikely; we expect the rates to stay stable. It is probably too early to discuss a rate cut but, as indicated, the time may come if the economy gets hurt more than expected.

The koruna has only slightly benefited from the rise of equity markets and the euro. On the other hand, it resisted to the influence of weakening regional currencies.

European debt crisis is still number one issue. No solution is on the table. The Eurozone leaders have not brought anything really new in their comments, although they try to temper current concerns. Germany, as the key player, assured that the Eurozone will survive unbroken, but still refuses the idea of common Eurozone bonds. However, according to EC President Barroso, options for the introduction of the bond will be presented soon.

The most important announcement came from the ECB. The bank will re-start lending dollars to banks. The action will be coordinated with the Fed and other central banks and aimed at muting credit crisis. The plan supported European banks that were under pressure due to draining dollar liquidity. Also the euro firmed after the announcement as risk appetite was boosted.

The plan brought a short-term relief, but obviously it does not solve the major problem, which is insolvency of some Eurozone members. European finance ministers meet in Wroclaw, but they are not very likely to agree on steps sufficient to contain the debt crisis. There is no common view on measures that could improve the current situation, which keeps uncertainty very high.

Nevertheless, it seems that the positive correction would probably have come anyway and the markets only sought for a trigger. They also ignored the US macro data that brought more bad news from industrial sector.

Next (2572 GBp, -0,08%) week, focus will be on the debt crisis and the Fed meeting. The form of further monetary stimulus will be an important driver. Besides that, some soft indicators from the Eurozone are scheduled. The CNB meeting should be neutral for the koruna. But a negative reaction will probably come if the meeting confirms that the Board has already started discussion about a rate cut.

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