The koruna-euro rate has little changed this week despite all the important events. The currency was marginally influenced by the local events and showed only lukewarm reactions to the global data and central banks´ meetings. We can see a similar situation on the other CE currencies that were surprisingly calm and end the week slightly stronger.
The Czech manufacturing PMI stays surprisingly high. It remains a touch below the 50 mark, while the PMIs in the Eurozone are already much lower. However, the good PMI reading does not seem inspiring for the koruna. It did not improve our view on the industrial sector that we expect to contract. Another Czech figure, the retail sales, also beat estimates, but remained negative, suggesting that the consumer demand was still weak in the 2Q.
As expected, the Czech National bank has left interest rates unchanged and worsened its macro projections. The bank now counts with a 0.9 pct. GDP contraction this year, which is in line with our prediction. We still expect the rates to stay stable in the next few months, but the risk of another cut is increasing. The new CNB projection counts with further decrease of interest rates and two board members voted for a cut at this meeting. Moreover, another dove, Governor Singer, was missing. It means that the support for further monetary easing is quite strong and this is negative for the koruna. However, meeting´s impact on trading was not significant as the markets focused rather on the ECB meeting held on the same day.
The ECB is aware that its intervention on the bond markets may be necessary, but at the same time it sees that its tools may only offer a short-term solution. That is why Mr. Draghi has introduced conditions for the interventions. The ECB wants the troubled countries to apply for financial aid from the rescue funds first, which should ensure a better supervision over their public finances and a bigger push for reforms. Then, the central bank would be ready to act together with the EFSF, capacity of which is insufficient for a bailout of Spain and Italy. The ECB would probably use second market interventions focused on shorter bonds, while it is still unlikely to provide the rescue funds with additional liquidity. The market reaction on the meeting result was negative, because the bank did not announce any immediate action. However, we do not consider the news from the ECB clearly negative; the bank´s action is still very likely to come, although it may be delayed by the new conditions. Anyway, for the koruna the meeting was only a source of short-term volatility and did not show the currency direction.
The Fed disappointed, too, as it did not indicate any new measure against the economic slowdown. However, the expectations were not as high as in case of the ECB, so the market impact was limited and short-lived. The bets on another QE remain an important driver. Recently, they have been muted by both the information from the Fed and the new labor market data that was better than expected.
week will bring new data from the Czech economy. As usual, we do not expect any big market reaction. The declining industrial production may support slightly the view that the CNB will push interest rates even lower. The inflation will stay elevated, but it is not a threat for monetary policy as the core inflation stays below zero.
The global events will be more important for the koruna than the local figures. week will not be very busy as for new macro data. There are some interesting figures from China on the agenda, while the US and the Eurozone calendars are nearly empty. The focus will be on the Eurozone policymakers and their reaction to the ECB call. The scheduled comments of Fed Chairman Bernanke will attract attention, too.