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Weekly CZK Report: Recession continues

Weekly CZK Report: Recession continues

20.8.2012 14:04
Autor: Tomáš Vlk, Patria Finance

The koruna has extended its short-term appreciation trend and got below the 25.00 mark against the euro. The Czech currency has outperformed its peers this week, helped by the prevailing appetite for risk on the global markets and, possibly, by a decent demand for the Czech bonds.

The recent Czech data has been neutral for trading as the GDP came out in line with estimates and the PPI has little potential to be a market mover. The Czech recession has extended into a fourth consecutive quarter as the economy contracted by 0.2 pct. q/q. The good results of the foreign trade cannot offset the falling domestic demand that is an obvious drag for the economy. Moreover, the worsening outlook for the Eurozone means that the foreign demand will provide smaller support in the next quarters.

This is quite important for the monetary policy, because the arguments for further easing are growing on importance. This week, Vladimír Tomšík said that the bank might need to be more aggressive in the future if it now holds back with rate cuts. The CNB Vice governor does not exclude non-standard tools, but does not want them to have quantitative effects. Tomšík voted for a rate cut at the last monetary meeting, but his comment suggests that he is turning even more dovish. The increasing probability of another rate cut is negative for the koruna; we see the comment as one of factors that discouraged the euro-koruna rate to continue farther below 25.00.

Germany and France have posted slightly better GDP figures, but they were not good enough to improve view on the economies. The data on the entire Eurozone was in line with estimates and confirmed the increasing problems on the periphery. Moreover, the German ZEW index fell even deeper below zero.

The US data was mixed. While the retail sales increased more than predicted and the consumer confidence improved, both Empire State and Philadelphia Fed indices surprised negatively, suggesting a contraction of the industrial sector. Overall, the figures had no big impact on expectations on another monetary stimulus.

In the Eurozone, Greece successfully placed treasury bills and raised more than the planned amount. German Chancellor Merkel supported ECB´s President Draghi´s approach and the conditions for potential ECB bond purchases. She also repeated the pledge to preserve the monetary union. The news had some positive impact but the debt crisis concerns do not seem to be muted significantly. Next week, Merkel will meet French President Hollande and then also Greek PM Samaras. The Greeks push for easing the bailout terms that they find hard to satisfy. The Troika will report on Greek progress in meeting the targets next month, which will determine whether the country can get another tranche from the international aid. Thus, the risk of Greek default will mount again and may make the markets nervous.

Other important points from next week´s agenda will be the Eurozone PMIs and the minutes from the FOMC meeting. The Czech calendar is empty.

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