The koruna has firmed against the euro as the region was bid, supported by local macro figures and after the ECB boosted demand for risk. The Czech PMI came out better than expected as it surpassed slightly the 50 point mark. Also the Polish and Hungarian indices are at or above that level. Moreover, the Polish GDP has kept strong growth and beat estimates. The data, overall, had some positive effect on the CE currencies.
The Hungarian central bank has left interest rates unchanged, but became more dovish as a 25bps cut was also discussed. The MNB statement suggests that a rate cut is quite likely during the year, but the bankers will wait until the government reaches the new loan deal with the IMF/EU. The MNB meeting outcome was in line with expectations and had minimal influence on the market.
The European Central bank allotted nearly EUR 530bn to 800 banks in its second three-year LTRO. The event was awaited as a potential boost for risk assets after the first LTRO had a significant positive influence on banking sector and bond markets. In fact, both the first LTRO and expectations that another round is coming were supportive. Finally, the ECB met the expectations; the amount of loans was slightly above estimates and gave riskier assets another boost. Risk premia on bonds were pushed down further, equities, especially banks, went up and also the CE currencies benefited from the new liquidity.
On the other hand, the euro has come under pressure and lost significantly to the dollar. While the lower risk premia are positive for the euro, the inflated ECB balance is not. The LTRO itself would probably not weigh on the euro, the losses were rather triggered by the Fed. In his semi-annual monetary policy report in the Congress, Chairman Bernanke was not as dovish as before. He was quite cautious in assessing the economic performance, although he said that the unemployment rate had improved faster than expected. The pledge to keep interest rates extremely low until late 2014 remained intact but Bernanke did not mention that the Fed could expand the stimulus. The euro was hit by the contrast between the Fed and ECB policy – the former becoming less dovish and the latter expanding its balance significantly.
The last macro data from the US showed that the economy may do without another stimulus. The GDP growth was revised to 3 pct, the consumer confidence improved and the Chicago PMI came out even higher than expected. On the other hand, the ISM Index and the durable goods orders muted expectations that the economy could accelerate further.
week, some more Czech releases are on the agenda, probably the trade balance figures will be the most important among them, but we expect them to have only limited influence on the koruna anyway. Markets will obviously focus on the US labor market report; the Chinese data may have some influence too. In the Eurozone, the ECB holds a monetary meeting and may hint whether we can expect more non-standard measures. The interest rates should stay unchanged.
With regard to possible risks for markets, there is also the Greek bond swap and Portugal yields. Although ISDA said that credit-default swaps would not be triggered by the Greek debt restructuring, it is not clear whether this will also hold if the collective action clauses are activated. Amount of Greek CDS is not high, but contagion might potentially spread to Portugal as Portuguese bond yields stay high although other countries see their yields fall. The country, therefore, remains vulnerable.
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