Weekly CZK Report: Positive regional news and demand for risk

This week the CE currencies have benefited from a bigger demand for riskier assets on the global markets. Moreover, they were also boosted by local news. The koruna has firmed by half a per cent against the euro.

The S&P downgrade of multiple Eurozone members led to an intensive sell-off at the end of last week. The price action was triggered by rumors just before the official announcement. At the beginning of this week, the news had already been priced in and had no further impact. Then, also the EFSF saw its rating cut as a consequence of the previous downgrades, but the event was neutral for trading.

Several bond auctions were scheduled in the Eurozone. All of them were successful, including the longer-dated Spanish and French papers, which showed that the rating cuts did no big damage to the market confidence. However, later in the week, Moody´s warned that ratings of big European and global banks will likely be downgraded due to fiscal issues, economic uncertainty and capital markets´ weakness, which had some minor negative impact.

The IMF proposes to raise its lending capacity by 500 billion dollars after it identified a potential need for financing worth 1 trillion in coming years. The higher capacity would help Europe to solve the current debt problems. It may calm down financial markets and increase chance for the governments to place bonds, while the fund will stay ready to provide aid if necessary.

Greece has restarted discussions with private creditors about the voluntary haircut. No official conclusions are out yet, but market seems to be rather optimistic about the result. However, even if an agreement with the IIF is reached, other creditors may refuse to accept the “voluntary” loss and, therefore, the risk of a messy default is still quite high.

The macro data released this week was good. The Philadelphia Fed index disappointed, but on the other hand, Chinese GDP, German ZEW Index, the Empire Manufacturing Index and some other minor releases came in above expectations. The US 4Q GDP is the most important macro figure on the next week´s agenda. Expectations are high – the economy should accelerate to 3 pct, significantly supported by domestic consumption. Furthermore, the markets may be influenced by the German Ifo Index and by the FOMC meeting held on Wednesday. There are also some bond auctions on the agenda; among them we see the Italian auctions on Thursday to pose the biggest risk.

In the region, we can see a progress in the Hungarian story, which was positive for the forint. The IMF and the EU have intensified its pressure on the country, insisting on concrete steps before the official negotiations about new credit line may start. Then, the Hungarian prime minister said that the government would abandon the criticized policies that obstructed the negotiations. In Poland, central bankers indicated that a rate hike is becoming more likely and repeated that the zloty has an appreciation potential. This was positive for the CE currencies, too. Czech PPI has eased slightly more than expected, but the news was not interesting for the koruna. Some central bankers’ comments that came in during the week had no influence on trading either. Czech calendar for next week is empty.