The koruna weakened at the beginning of the week, but then improved its performance. All the CE currencies tracked the global markets where negative sentiment prevailed. Local news, including the Czech government crisis, played a minor role.
The beginning of the week was negative due to the disappointing US macro data released last Friday. The figures have tempered optimism about the economy and muted risk appetite across the markets. Moreover, bonds on the Eurozone periphery remained under pressure of worries about the Spanish economy and banking sector, which worsened the overall sentiment.
Later on, the position of riskier assets improved thanks to bets on a supportive role of central banks. One of the ECB representatives noted that the bond-purchase program is still available, which helped to stabilize the bond markets. Two comments from the Fed supported expectations that the interest rates will stay close to zero through 2014 and even might have led to speculations on further monetary stimulus. The BoJ Governor pledged to pursue monetary easing to fight deflation and help the economy to get to a sustainable growth path. The markets were also supported by the positive start of the U.S. earnings season.
However, on Friday the risk-off sentiment returned after China´s macro data confirmed that the economy is slowing down. The 1Q GDP growth was lower than expected; the industrial production and the retail sales figures beat estimates, but also confirmed the slowdown. The figures suggested a rising risk of a hard landing, which is important since China is the key driver of global economic growth.
The Czech macro data was uninspiring for trading. The unemployment rate has decreased slightly more than expected thanks to positive seasonal factors. The inflation came out below expectations, too, but did not change our outlook for the interest rates. Currently, the consumer prices are mostly driven by non-core and tax factors, while inflation expectations remain anchored by the weak domestic demand.
The Czech government coalition has overcome another crisis, cutting down the risk of early election. Although the fall of the government had been a real threat, the event was neutral for the market in the end.
In the region, the forint was negatively influenced by the ECB call on the country to make further changes of the central bank law, which will probably delay further the IMF/EU talks. Although the impact was not big, the issue remains a risk for the forint.
The euro was quite resistant to the higher risk aversion and the Spain concerns. The euro-dollar rate is roughly unchanged thanks to the supportive role of expectations that the Fed will maintain its loose policy. week will bring some interesting releases like the US retail sales and the NY and Philadelphia Fed indices that will influence the expectations. In the Eurozone, two important German soft indicators are on the agenda. Besides that, the bond markets are still a risk.