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Last week the koruna slowly moved towards a new 2.5- year high of CZK 29.525 per EUR

8.3.2005 9:06

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)

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