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Weekly CZK Report: Italy overshadows Greece

Weekly CZK Report: Italy overshadows Greece

14.11.2011 10:33
Autor: Tomáš Vlk, Patria Finance

Czech data, released this week, have confirmed that the real sector is losing strength. Industrial production slowed down further and so did exports and imports. The trade balance posted a significant surplus, but only thanks to a sharp slowdown of imports. Also retail sales pointed to a weakening domestic demand; they dropped unexpectedly. The unemployment rate has decreased, but other figures from labor market showed that negative trends start to emerge. On the other hand, inflation came out a touch above expectations, which lowers the risk of a rate cut.

Overall, the data brought evidence that the Czech economy is losing steam, tracking the Eurozone. Moreover, data from German industry surprised negatively and confirmed that outlook for the Czech economy is worsening. Both Ministry of Finance and the central bank have already lowered their projections for next year´s growth. So did OECD and the European Commission. We believe that the worsening fundamentals have weighed on the koruna this week and also made the currency more vulnerable to negative news from abroad. The CE currencies including the koruna have weakened significantly and failed to pare the losses at the end of the week, in contrast to equities and the euro-dollar.

World markets were mostly influenced by Italian bond market. The bonds came under pressure and yields surged well above 7 pct. The country´s debt financing is seen unsustainable above this line. Default fears then weighed heavily on risk appetite across the board, the euro-dollar was pushed down to a 1.3500 level. The rapid changes in the market induced the ECB to intervene. Next day, the yields dropped back below 7 pct and the ECB was said buying significantly. The central bank was also seen behind a successful auction of Italy´s bills. At the end of the week, concerns about Italy have somewhat eased thanks to the lower yields as well as progress in passing the budget and forming new government.

But, the positive correction may turn out only short-lived. Key question for the Eurozone is what to do when Italy is forced to apply for external financial aid. The country is too big to save - the EFSF is unlikely to gather enough funds on the market. Germany and the ECB still oppose a massive involvement of the central bank, but at the moment it seems to be the only way to calm down markets. Next week the bank will publish the amount of bond purchases that may show that the interventions are increasing despite the official rhetoric. Any news about the ECB involvement should be very important for markets. The attention will also stay focused on Greece and its progress with the national-unity government. However, a bigger problem is Italy and a possible contagion of Spain and France.

Besides that some interesting macro releases are in the calendar. It is the GDP figures from the Eurozone, the US retail sales and also a couple of soft indicators like the German ZEW index and the Philadelphia Fed index.

The Czech koruna should mostly track the global markets, but it may also be influenced by the Czech GDP. The economy is expected to show nearly stagnation in the 3Q compared with the previous quarter, while the year-on-year growth should slow down.

The whole analysis can be downloaded HERE by Patria Plus subscribers

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