The koruna has reversed and erased the previous week´s losses. The move was not based on the new Czech macro data that was not supportive for the currency. The region did not show the koruna direction and the global markets drew a mixed picture. The koruna´s gains may be related to a higher demand for the Czech bonds.
The last data has confirmed that the Czech economy is increasingly dependent on the foreign demand. The trade balance surplus beat expectations. However, as the Eurozone problems mount, the demand is worsening and makes it harder for the local economy to get out of recession. The industrial production, still relying on automotive industry, decreased more than expected. The inflation figures were slightly above the consensus, but do not change our view on the monetary policy; the rates should stay stable in the months to come. Governor Singer said that theoretically the rates may go down until they are zero, but we do not see the comment as indication of further easing.
The Spanish yields have decreased as the Eurozone finance ministers agreed to disburse EUR 30bn for the Spanish banks and the Spanish government approved new fiscal package. Moody´s has downgraded its rating for Italy, but it only had a short-lived impact on the markets.
However, the lower yields failed to support the euro. The Eurozone´s shared currency has weakened against the dollar, extending its losses from last week. The pair was influenced by speculations on the Fed´s policy. Although there are still expectations that the QE3 will finally come, they were somewhat muted by the minutes of the last FOMC meeting. They showed that there is not a strong support for further monetary stimulus. Besides that, the euro still seems to be influenced by the recent rate cut. The banks´ deposits at the ECB have shrunk significantly, which has pushed the money market rates even lower. The euro is, thus, less attractive and finds hard to benefit from situations, when risk appetite is growing.
The equities are slightly lower, influenced by the last news from the Fed. The macro data was, overall, rather worse than expected, but its impact was not completely negative. The Chinese figures came out slightly below expectations but this boosted bets on a more aggressive monetary easing, which was supportive for the equities.
week, the markets will focus even more on the Fed´s policy and the likelihood of another stimulus. Chairman Bernanke will deliver the semiannual report on monetary policy to the Congress and the Beige Book will be published. Moreover, there are several interesting releases in the agenda, such as the retail sales and the business activity indices.
In the Czech Republic, only the PPI report is scheduled. We do not see the data as important for trading. The elevated demand for the Czech bonds will likely prove to be a short-lived factor; we do not expect it to give the koruna further significant boost. The koruna and the zloty may outperform the forint because of the new financial transaction tax that is a potential complication for Hungary´s negotiations with the IMF/EU.