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Weekly CZK Report: Monetary easing in the region

Weekly CZK Report: Monetary easing in the region

3.9.2012 16:10
Autor: Tomáš Vlk, Patria Finance

The koruna has little changed against the euro this week. The currency outperformed its regional peers that came under pressure of local news. Moreover, the koruna was quite resilient to the influence from the global markets.

The news from the region was negative. In Hungary, the central bank has cut interest rates surprisingly. The cut has not come out of the blue, but was expected to come later. Evidently, the key reason behind the rate decision was the weak economy and its outlook, while the central bankers believe that no second-round inflation effects will occur and that the risk assessment will improve further. In Poland, the GDP slowed more than expected in the 2Q. Moreover, Governor Belka said that there is a discussion about rate cut in the central bank. Thus, monetary easing has become more likely.

In our opinion, monetary easing is also likely in the Czech Republic. The rates may be cut at the next meeting. Such an outlook has already been reflected in the bond and FRA yields, but not yet on the koruna. The Czech currency has been less influenced by the monetary policy outlook than its peers probably because the rates are already much lower than in Hungary and Poland. However, we believe that this factor will be a drag for the koruna in the upcoming weeks.

All the week, the markets stayed focused on the monetary policy ahead of the Jackson Hole meeting. New macro data had very limited impact and so had the Beige Book and new information from the Eurozone. In his comment The Fed´s Chairman did not rule out further asset purchases. Bernanke repeated that the Fed will provide additional monetary stimulus as needed to promote a stronger recovery and sustained improvement in the labor market. However, no immediate action has been announced. Although the market expectations had been quite high, the comment did not have any big negative impact.

As for the Eurozone, ECB´s Jens Weidmann still strictly opposes bond purchases, but Jorg Asmussen said that this measure will not mean financing of governments and that the ECB will finally push it through. This supports the expectations that in the end, the action will come. On the other hand, Angela Merkel confirmed that current treaties are not consistent with a banking license for the ESM. However, this will not be needed if the ECB intervenes directly.

Next week, there are some interesting Czech releases on the agenda. We will learn details about the GDP that should confirm our view that the economy stays in recession due to the domestic demand. We expect similar information also from the retail sales, while the industrial production might pick up slightly after the previous contraction. Our view is that the figures will further support the expectations of monetary easing.

The major markets will focus on two topics: the ECB meeting and the US macro data. The European Central Bank is expected to cut interest rates. It may also reveal more details about the potential bond purchases - especially preconditions and timing would be important information. As usual, the US labor market data and the ISM index will be awaited. They will also contribute to discussion about timing of the Fed´s action that is still open.

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