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Weekly CZK Report - Markets boosted by news from Europe

Weekly CZK Report - Markets boosted by news from Europe

28.10.2011 9:57
Autor: Tomáš Vlk, Patria Finance

As usual, the Czech events had minimal influence on the koruna during the week. No data were scheduled. Central bankers commented on monetary policy but none of the comments was surprising. It seems that stable interest rates are widely preferred in the Monetary Council. Market expects the same. Next (2532 GBp, -1,86%) week´s meeting should bring no change in rates and a neutral stance of the central bank. We see the rates stable not just for now but also in the next two quarters. The meeting has little potential to influence the FX market.

The koruna is stronger compared with last week. It has tracked the rally on the euro-dollar and equities after the EU Summit. The important message from the Summit is that banks agree with a 50pct haircut of Greek debt and the EFSF fire-power will be boosted to one trillion euro. Thus, there will be a support for the banking sector that will face losses from the write-offs and that will also need to raise capital, which was another point of the deal. It is a breakthrough after a series of disputes and unsuccessful attempts to deal with the debt crisis. European policymakers made a step forward.

Obviously, the Summit has not solved all the problems. The mechanism used for the EFSF boost is only a higher leverage; no additional sources of capital are on the table. Moreover, the Greek debt will be still unsustainable even after the partial write-off. The country will, therefore, need external support and we will likely see another haircut of debt in years to come. However, these issues currently do not weigh on the markets.

Not all the week was positive. Quite a lot of news came in before the first EU Summit held on the weekend and the second one on Wednesday. Market expectations were changing frequently and were rather negative just before the final EU statement was released. This led to some swings on the euro-dollar, but volatility was not extremely high. The koruna was influenced slightly by the swings, but did not show a significant reaction until the rally later in the week.

The key macro figure released this week was the US GDP. The US economy accelerated to 2.5 pct according to the preliminary data, driven by household spending. This strong result even boosted the positive market sentiment. However, beforehand market was influenced by disappointing consumer confidence index and by worse-than-expected German and Eurozone PMI.

Next week, market attention will likely turn from the European debt crisis to macro data and central banks. Both the Fed and the ECB will decide on interest rates. According to current estimates, the ECB is set to cut its rates in the 4Q. There are speculations about further bond purchases by the Fed. But the last macro figures were good and may influence its stance. Some more important releases are also scheduled for next week, including the US payrolls and ISM reports.

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