The koruna-euro rate has returned to a higher level, although it stays below the 25.50 mark. The Czech currency mostly tracked the euro-dollar and, thus, was negatively influenced by the European debt crisis that is currently the most important market driver.
In the first days of the week, the markets were preparing for another EU Summit. At the beginning, there were expectations that the EU leaders will introduce measures to tackle the crisis and to recover the ailing economies. Such expectations were supported by the weekend G8 meeting. However, the hopes for solution then decreased, probably because of the mostly negative experience with the EU meetings. At the Summit the European leaders stated that they want Greece in the Eurozone, but insisted on all the requirements given by the rescue program. As for the growth stimulus, the Eurozone might use its structural funds and money from the EIB, which is not too much. The important questions such as the eurobonds and the direct bank recapitalization from the ESM are still a subject of argument. Overall, the Summit outcome was not supportive for the markets and confirmed that there was no reason for high expectations.
Attention now turns to the ECB that has tools to support bond markets and the banking sector. With the new president the bank seems more flexible than before and this may raise expectations that some new measures might be introduced. Moreover, it would be helpful for the Eurozone to get further support before the Greek election that will likely make the markets jittery. News indicating the ECB stance will be an important driver for markets in the weeks to come.
On Friday, focus turned back to Spain as Catalonia called for help from the central government to refinance its debt. It pointed to the big problems in Spain´s regional finances.
Bad news from Europe is not just about the debt crisis. The recent macro data has also brought negative surprise. The PMIs from all Germany, France and the Eurozone had dropped last month and were expected to stabilize. However, they fell even lower in May and now stand significantly below the 50 mark. Although the last GDP figures were not too bad, the PMIs indicate that the Eurozone economy is likely contracting. Moreover, the German Ifo index has also deteriorated. It is clear that the worse economic performance will escalate the fiscal problems even further.
week, important macro data will come from the US. The ISM and payrolls reports will show whether the economy is still resilient even if others, Europe and China, post worsening figures. For the markets, this will be another important driver.
No data has recently come from the Czech Republic, but the macro figures from the Eurozone give negative indication about the local economy, too. CNB members Kamil Janáček and Vladimír Tomšík have commented on interest rates. Janáček still favors stable rates as he does not see important factors for a rate cut. Tomšík said he had the same view on rates as at the May meeting when he voted for a cut. We do not see the comments as surprising and stick to our expectation that the interest rates will be lowered at the end of June. The OECD lowered its forecast for the Czech GDP to -0.5 pct. this year, while they expect the economy to start expanding next year. The new forecast is reflecting the last negative information from the Czech economy and is in line with our current estimate. Czech Petr Nečas warned that if all proceeds from the EU funds were stopped, the Czech public deficit would surge to 6 pct. of GDP. It would hurt the fiscal consolidation efforts as the government plans to cut the budget gap below 3 pct. However, it seems that so far a total funds suspension is probably not a real threat.
The koruna has not reacted to the local news this week. It is tracking the sentiment on the global markets and this will not change. The Czech PMI scheduled on next Friday will probably drop further, inspired by the Eurozone figures. It should confirm that local fundaments are unlikely to support the koruna against negative external shocks.