Last week the koruna slowly moved towards a new 2.5-
year high of CZK 29.525 per EUR, after it opened the week
at CZK 29.66 per EUR last Monday. By and large,
however, market trading was limited to narrower bounds
compared to more eventful weeks. The market lacked major
domestic stimuli because no significant domestic economic
data was released and the dispute inside the government
coalition did not start to develop in any new direction
either. Thus Monday’s weekly low (of CZK 29.78 per
EUR) can only be due to some profit taking, following the
previous temporary rapid appreciation. Trading on
Wednesday and Thursday was affected by the events in
neighbouring Poland, where the Prime Minister initially
frightened markets but later denied the speculations about
his resignation. Hence the koruna, along with the zloty, first
weakened and then, on Thursday, returned to record-high
levels. At the end of the week the koruna benefited from the
fall of the dollar, which usually helps all Central-European
currencies.
The koruna should continue to appreciate cautiously this
week. All major economic indicators including the GDP
will be released within the next eight days. The data should
be mostly favourable for the koruna, starting from
Monday’s foreign trade surplus. The appreciation of the
koruna should also be encouraged by high GDP growth and
the low current account deficit. Furthermore, the dispute
inside the government coalition has calmed down until the
Easter congress of the Czech Social-Democratic Party
(ČSSD). Therefore we consider possible comments from
the central bank as the main danger for the koruna now. In
addition, the central bank will probably cut interest rates at
the end of this month because of the strong koruna. The
latest data on the central bank’s trading on the foreignexchange
market confirms that the CNB is very sensitive
about the strong koruna. The Czech National Bank almost
stopped selling the yields from its foreign-exchange
reserves in December and January. The bank started to sell
them in April 2004 and in previous months it sold up to
EUR 92 m per month. If the expected scenario actually
happens, the koruna might hit the stronger end of the
trading range this week, i.e. CZK 29.35-29.66 per EUR. On
the other hand, verbal interventions of the central bank or
surprisingly unfavourable results of some of the indicators
could make the koruna return to the weaker threshold.
(CSOB Investment research)