The koruna has pared some of the recent losses this week, supported by risk-on sentiment on the global markets. It was based on speculations about the currently most important issues, the Spanish bailout and the monetary policy in the Eurozone and the US.
The capital shortfall of the Spanish banks has not yet been figured out precisely, but it is quite clear that the government will not be able to bail the sector out because it faces too high bond yields. A direct aid for the banks from the ESM is opposed by Germany, while Spain, itself, refuses to accept international aid. The two different views may eventually get closer to each other; a possible compromise solution would be to send the EU money to the banks through the Spanish rescue fund Frob. No such a solution was announced yet, but the markets would appreciate if Spain got the aid soon and so there are a lot of rumors about the issue.
The ECB has left interest rates unchanged, as expected. The bank has extended its current liquidity programs, but did not announce either a new round of the 3Y LTRO or other new measure. However, President Draghi said the bank stayed ready to act if needed. It was probably less than what the market had hoped for, but speculations about a possible action continued.
There are speculations about a stimulus by the Fed, too. In some of the last comments there were indications that the US central bank might launch QE3 or extend the Twist operation. However, Chairman Bernanke only repeated his previous statements - the Fed stays ready to act if necessary, especially if European problems weigh significantly on the US economy. It was negative for riskier assets as markets counted with more dovishness. Bernanke´s testimony sparked a correction at the end of the week.
The negative mood was also supported by Spain´s rating downgrade by Fitch and German bad foreign trade data. Moreover, Fitch also warned that the US may lose its top rating next year if no fiscal consolidation plan is introduced.
On the other hand, the ISM report from non-manufacturing sector beat expectations, China cut interest rates and Spain placed successfully its bonds at the Thursday auctions. These events were supportive for risk appetite during the week.
Czech retail sales dropped by more than 4 pct. in April and proved that the local demand is currently weak and keeps the economy in recession. The release had some short-lived negative impact on the koruna. Other data was neutral: The industrial output accelerated to 2.2 pct., more than expected. The 1Q GDP was revised upward to -0.7 pct. q/q, but the figures are still much worse than estimates. The unemployment rate continued downward trend given by benign seasonality and decreased to 8.2 pct. The inflation data is scheduled for next week and may be more interesting than usual, because it may influence expectations about rate cut that has become a real option for the June CNB meeting. A potential surprise in the inflation figures would probably influence the koruna.
Anyway, the Czech news will stay in the shade of the global issues. The Greek election is scheduled for the next weekend and will make markets jittery. The EU or the ECB may step in anytime; if they help Spain the risk connected to the election will shrink considerably.
Besides that, there are some interesting macro releases on the program. China has already begun monetary easing; the monthly macro data, which will be published over the weekend, will indicate how aggressive may be the next central bank´s steps. The monetary policy aspect is also very important in the US where the macro agenda contains releases such as the retail sales, consumer confidence and Empire Manufacturing index.