The koruna has extended its weakening as the euro-dollar remains under pressure of the European debt crisis and the CNB will likely cut rates at the oncoming meeting. The Czech currency underperformed regional peers as both the forint and zloty were supported by local factors.
In his comment, CNB Governor Miroslav Singer stressed the downside inflationary risks that have become more significant. The CNB holds its monetary meeting next Thursday and we expect the bankers to cut interest rates by 25 bps. Market survey shows that this view prevails. The recent comments and the macro data from both the Czech and the Eurozone economy has boosted bets on the cut, which was negative for the koruna.
Conversely, the forint was supported by a progress in the emergency loan issue. The government has submitted amendments to a disputed bank law, which brings the country closer to a deal with the IMF/EU. As the emergency loan will likely ease tension on the bond market, it is also positive for the forint and makes it somewhat more resilient to negative external shocks. The Polish zloty was supported by another intervention by the state-owned BGK bank. The local events brought some divergence in trading with the CE currencies. To a certain extent, it may persist also next week, when the Czech interest rates are expected to decrease, while the Hungarian MNB will probably keep them on hold and no rate change is currently in the pipeline in Poland.
The global markets were mostly focused on Greece, Spain and the Fed. The Greek election result was positive as the pro-European parties were given chance to build coalition, what they did few days on. However, the election result failed to spark any big optimism and only brought a short-lived market reaction. Although the big concern about Greece´s disorderly default did not came true, the pressure on the Spanish bonds did not ease.
However, situation on the bond markets has improved later on. The Spanish and Italian yields have decreased mostly thanks to expectations that the ESM funds will be used for bonds purchases. Germany has already admitted this option that is boosted by France and Italy. The ECB has eased terms for collateral used by banks to access its funding. Spain has successfully placed new bonds and the independent audit of its banking sector has not surprised. The capital shortfall is estimated at EUR 51-62bn, which is at the expected level and below the pledged 100 billion aid from the EU.
At its last meeting the Fed has extended the Twist operation to the end of the year and raised the volume by USD 267bn. The economic activity and employment forecasts were lowered but, on the other hand, Chairman Bernanke stressed that the Fed is ready to come in with more stimulus if needed. Thus, the bets on QE3 will stay significant. The Fed meeting brought some short-term volatility, but did not show markets clear direction as the outcome was mostly priced in.
The macro data released during the week was not good. The Philadelphia Fed index and the German ZEW were disappointing and the PMIs in China and the Eurozone also came out below expectations. Moreover, Moody´ s downgraded its ratings of fifteen global banks, which weighed on risk appetite later in the week.
week, some important macro statistics will be published in the US. The consensus for the consumer confidence index and the Chicago PMI is quite optimistic given the last disappointing data. The EU holds another Summit that may raise some hopes. The EU leaders may confirm that the ESM may purchase bonds directly, but it is questionable whether the Summit will bring any significant progress in other issues. The markets will continue to speculate about a potential ECB action; as the crisis continue, the bank is under increasing pressure to step in.