The koruna has weakened above the 25.00 line, driven by negative sentiment on the global equity markets, the decreasing euro-dollar and local news. In the region, the forint, once again, outperformed its peers thanks to gains at the beginning of the week.
There were two interesting events on the Czech agenda this week and both were negative for the koruna. The manufacturing PMI dropped below the 50-point mark and tracked the low PMIs in the Eurozone. Then, the CNB left interest rates unchanged, as expected, but the voting result showed that the door for further monetary easing is not completely shut. Four Board members voted for no change, while two favored lower rates and one member, as usual, voted for a rate hike. The new CNB projection has marginally changed compared with the previous one. It suggests the interest rates to get slightly lower in the second half of the year, but then to start rising late in 2013. Up to the April meeting the central bankers favored keeping rates stable, but now they turn more dovish, although at the same time they see pro-inflationary risks prevailing. The CNB stance should be explained more precisely in the minutes next week, but it is clear that a risk of a rate cut has increased. The meeting has weighed on the koruna and, moreover, the change of the bias may be slightly negative for the currency in the short-term outlook.
The ECB has left interest rates unchanged, too, and did not discuss further monetary easing or using extraordinary tools. President Draghi appreciated a significant progress in the fiscal area, while on the other hand he mentioned prevailing downside risks for growth and a more uncertain outlook than before. As no further monetary support was indicated despite the worsening macro figures, the riskier assets were pushed lower, while the euro saw some gains. However, the effect of the ECB meeting was short-lived.
The recently published macro data from the major economies was, overall, worse than expected and deteriorated market sentiment. Bad news has come from the US labor market; the Eurozone PMIs dropped even deeper below 50. On the other hand, the ISM Manufacturing has improved slightly.
week, the macro calendar is not that busy. In the US the most interesting figure will be the consumer confidence index; China will publish its monthly set of data on Friday. We see its importance increasing as markets are currently quite nervous about the economic outlook and China, as the global growth leader, is slowing.
The Czech statistical office will release local economic data. As the CNB has sparked discussion about monetary easing, the figures from the real sector may have more influence on the koruna than before. Inflation will stay elevated, driven by non-core items, while demand pressures should prove they remain very low.
The weekend elections in France and Greece are a risk factor. In France, victory of the leading Socialist candidate would be considered risk for the current German-French crisis management and might also jeopardize fiscal consolidation. In Greece, the parliamentary election may weaken the ruling parties that pledged to continue with the austerity program.