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Weekly CZK Report: Monetary policy impact

Weekly CZK Report: Monetary policy impact

19.3.2012 9:40
Autor: Tomáš Vlk, Patria Finance

The koruna has strengthened this week and extended its move to the 24.50 level. The Czech currency has outperformed its regional peers. Local data had minimal influence on trading. The price action was driven by equities on the global markets, although in daily trading, the link between the CE currencies and the major markets was unreliable.

As a reason of the weaker relation we see the monetary policy of the ECB and the Fed. After the European Central Bank gave banking sector another massive injection of liquidity, attention turned to the Fed. Its bias has become less dovish thanks to the last US macro figures that were better than expected. At its March monetary meeting the FOMC confirmed that outlook for the US economy is improving, the unemployment rate has declined notably and also the financial markets are in better shape. Although the Fed pointed to problems like the real estate sector, it did not make a mention of further quantitative easing.

The dollar had benefited significantly from the change in the Fed´s bias, but the meeting itself gave it no further boost as it did not bring anything surprising. The equities are focused rather on the good macro data then the slight change in Fed´s rhetoric. Moreover, they are still supported by the ECB liquidity and, thus, keep on going up despite the decrease of the euro-dollar. The CE currencies were given mixed signals during the week and their correlation with the equities lowered.

However, at the end of the week it seems that the monetary policy factor is losing strength and the markets are driven rather by the risk appetite. Therefore, the koruna and its peers should become more correlated with the equity markets again. As for the euro-dollar, the risk appetite factor should prevail, but the rising yields of treasuries may still be a drag for the pair.

This week, the European debt crisis has not been as important driver as before. After the ECB made the second LTRO and the second bailout package for Greece was approved, the issue now represents a lower short-term risk. Although the CDS on Greece were triggered, their impact on markets was not big.

The recent macro releases in the Czech Republic, the industrial production and the retail sales, were slightly better than expected. Also the current account surplus beat estimates, while producer prices slowed down more than predicted. Overall, the Czech data is improving gradually, but does not change our view on the monetary policy. The interest rates should stay stable. No important Czech releases are scheduled for next week.

In the region, the Hungarian dispute with the EU is still a risk for the forint, while its potential influence on the koruna should be minimal. The global macro calendar is nearly empty. The European PMIs should be the most important data.

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