Weekly CZK Report: Spain and Greece vs. coordinated action hopes

The koruna has registered some limited losses this week, in line with the region and after the CNB rate cut became even more likely. The global markets currently face significant risks connected to Spain and Greece, but are supported by hopes that the central banks will step in.

This week started positively after the EU approved a financial aid for the Spanish banks worth up to EUR 100bn. However, the positive effect was short-lived and optimism waned. The Spanish bonds came under pressure again as the financial aid will add to the country´s sovereign debt and raise it to about 90 pct. of GDP.

After it had downgraded its rating for Spain, Fitch has also cut ratings of eighteen Spanish banks and warned that the country will not be able to meet its fiscal target. Fitch also said that the Eurozone countries, including those with AAA ratings, risk downgrades because politicians fail to prove they can tackle the debt crisis. Then, also Moody´s has downgraded the Spanish rating, saying that the aid request suggested weakness of the country. Moody´ s also sees an increasing risk that the financial aid is not sufficient and the country will ask for more in the months and years to come.

The repeated parliamentary election in Greece takes place on weekend and represents a significant risk for financial markets. The far-left Syriza seems to be slightly in the lead, ahead of the New Democracy. However, the surveys indicate a small difference between the two and there is also uncertainty about the form of a new coalition. Anyway, both leading parties want Greece to stay in the Eurozone, but will likely push for some easing of the bailout package conditions. The talks with the EU mean high uncertainty for the markets for some time.

On the other hand, the Greek risk is a motivation for the EU policymakers to introduce supportive measures in order to stabilize banking sector and bond markets. Reportedly, central banks are already preparing for a coordinated emergency action for the case the Greek election will lead to market turmoil. They would probably provide another liquidity injection. The action may be discussed on the G20 meeting early next week and make it a very important event.

Although the European news plays the key role, the monetary policy in the US is also important. As the problems in Europe intensify and the US macro figures worsen, bets on further monetary easing are growing. This week, new data showed that retail sales decreased more than expected, Empire State index dropped significantly and the consumer inflation eased more than predicted. Moreover, some dovish comments have recently come from the Fed and, thus, it seems that the door for further monetary stimulus is opening even more. The Fed may confirm it at its monetary meeting scheduled on next Wednesday.

Thanks to the bets on a support from the central banks, the markets have been quite resilient to the Spanish problems and the big uncertainty before the Greek election. The euro-dollar trades higher than last week and also equities are stronger. The CE currencies have weakened, but their losses are limited. On the other hand, the Spanish and Italian bond yields have surged.

Besides the G20 and the Fed meeting there are some other important events next week. In Europe, the PMI figures will be released and Germany will publish its ZEW and Ifo indices. In the US the most interesting figure will be the Philadelphia Fed survey.

The recent macro data from the Czech Republic was not surprising; both CPI and PPI figures came out roughly in line with expectations. CNB Board member Lubomír Lízal sees prevailing downside risks for inflation due to the weak domestic demand. The comment was slightly negative for the koruna as it supports the view that the interest rates will go lower at the end of June.