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Weekly CZK Report: Negative end of the week

Weekly CZK Report: Negative end of the week

23.07.2012 11:42
Autor: Tomáš Vlk, Patria Finance

The koruna was quite successful at the beginning of the week, but then reversed and weakened. The Czech currency has underperformed its regional peers as it was influenced by local news and failed to benefit from situation on the global markets.

The Czech government has lowered its GDP forecast; now they expect the economy to contract by 0.5 pct. this year. In consequence of the worse economic outlook, the fiscal consolidation plan was revised, too. The budget gap is set to shrink more slowly. This is negative news for the koruna as the fiscal consolidation is a source of its resilience.

Other Czech events were uninspiring. The PPI came out in line with estimates, the government has survived another non-confidence vote and the comment by CNB´s Kamil Janáček did not bring anything surprising.

In his semi-annual report on monetary policy, Fed´s Chairman Ben Bernanke stressed risks for the US economy, including the European crisis. He also repeated that the Fed is ready to act if needed. However, he did not mention conditions or details of the potential action, which weighed temporarily on the markets. The negative effect was only short-lived as the statement has not muted the expectations that the QE3 will finally come. There are also expectations that the Chinese central bank will come in with a more aggressive monetary support.

The last macro data was rather negative as the US retail sales decreased unexpectedly and the Philly Fed index stayed very low. Moreover, the IMF has lowered its global growth estimates. On the other hand, the US industrial production was a touch better than estimates and the Empire Manufacturing index increased more than expected.

The European crisis continues to bring stress on the markets. During the week, the news had little influence as there was a support of the good corporate figures and of the expectations about monetary policy. However on Friday the risk aversion increased significantly on news from Spain. In its new forecast the Spanish government expects the economy to contract next year. Moreover, Valencia, a highly indebted Spanish region, said it would seek financial aid from the central government. It is already second region in problems after Catalonia had requested aid in May. The Eurozone finance ministers have agreed on financial aid package for Spanish banks, which was expected. However, two questions are still an important risk: guaranties by the Spanish government and a potential restructuring of the banks´ debt. The Spanish bond yields are growing again and hit new highs.

Furthermore, the ECB announced that from 25th July the Greek bonds will not be accepted as collateral, which also boosts fears about banks.

Next week, the markets will likely stay focused on Spain. There are also some important soft indicators from the Eurozone on the agenda. They may influence expectations on the ability to contain the debt crisis. In the US, the first release of the 2Q GDP will be released to show how significant is the economic slowdown. The data will be important for the QE3 expectations.

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