The koruna weakened further to the euro during the week as global markets remain under pressure of the Eurozone debt crisis and the local data dented the currency´s resilience. However, the losses were erased on Friday, possibly thanks to a demand of the Czech exporters for hedge at the higher rate levels.
The key negative factor is Greece and the Eurozone. A list of recent negative news is quite long, but the most important is the mounting risk of Greece´s chaotic default and the contagion spreading out to other countries. Very likely, the repeated Greek election will further strengthen the extreme political forces that will drive the country towards default and, possibly, exit from the monetary union. It would be very bad news for the Greeks but the rest of the Eurozone must be more concerned about Portugal, Spain and even Italy that are coming under pressure on the bond markets.
While the Eurozone will make last try to persuade the new Greek leaders not to change the current policy, it will also prepare for the case they will. It is crucial to ensure stability of the banking sector and to keep bond yields contained. In both cases role of the ECB is vital. The bank is coming under increasing pressure to resume its bond interventions and liquidity programs in order to stabilize markets. As usual, the ECB resists so far acting aggressively, but it is not ruled out that the bank will indicate some supportive steps in the coming days, especially if the contagion accelerates. Such an indication would likely improve risk appetite and bring a significant market correction.
The koruna has been quite sensitive to the sell-offs on the global market this week. Its resilience was dented by negative local news. The Czech GDP dropped by 1 pct. in the first quarter. The economy plunged even deeper to recession despite the upbeat GDP data from Germany and Slovakia, the country´s key trade partners. The surprisingly low figures prompted a change in expectations about the interest rates. We expect that the CNB will cut them at its next meeting. This view was supported by the last Vladimír Tomšík´s (CNB) comment that showed that the cut is getting more support in the Board.
Other releases from the Czech economy, the PPI and current account, were neutral for the koruna. The C/A posted another decent surplus thanks to foreign trade, while the PPI was lower than estimates and suggested that supply-side inflationary pressures have eased and are not any obstacle for the rate cut. No interesting local releases are scheduled for next week; potentially, the koruna may be influenced by another comment from the CNB.
On Friday the Czech currency has erased its losses from the previous days although no support from local news has come in. Some short-lived factors may be behind, like a higher a demand of hedgers. We expect that the move will not last very long and the koruna will resume tracking the global markets again. That is why the most important factors for trading should be the debt crisis and the ECB stance, while some short-term impact may also come from the scheduled macro data. There are some interesting soft indicators on the agenda like the Eurozone PMIs and the German Ifo index.