Focus FX weekly

15 Decembrie 2011

RAIFFEISEN BANK S.A.

 

EUR/CZK

EUR/CZK: 25.65 - 25.2 (March)

As the EU summit did not fully satisfy market expectations, risky assets lost ground and the Czech koruna weakened against the euro again. Political negotiations about the future of the Eurozone will probably remain the key market mover. On the domestic front, two central bank board members expressed the idea that the weakCZK is the only pro-inflationary element, as there was no domestic inflationary pressure. Altogether, this underlines the uncertainty surrounding not only the markets, but also the policymakers. For the next CNB meeting on 21 December we do not expect any change in the key repo rate. Given our rather negative outlook forGDP, we expect that the next monetary policy move will be a rate cut. Such a decision should not significantly affect the EUR/CZK exchange rate. By contrast, if CZK remains on the weaker side the CNB might be reluctant to cut rates further.

 

EUR/USD

EUR/USD: 1.319 - 1.30 (March)

Since the middle of last week, the euro has remained in a tight range around EUR/USD 1.34. Movement in the rate was only seen in the wake of the ECB’s rate-setting decision on Thursday. The ECB’s stubborn refusal to play a stronger role in resolving the sovereign debt crisis, i.e. by expanding its purchases of government securities, prompted a quick slide of 1.5 cents to EUR/USD 1.328. By Friday, however, these losses were recouped completely. Market participants’ initial reaction to the EU summit decisions (see today’s special publication “EU Summit: Another Step Forward”) was positive. Over the weekend, however, the markets then appeared to re-examine the results of the meeting and as the initial euphoria cleared it quickly became clear that the latest decisions had not really changed the current situation at all. As a result, the euro then slumped to below EUR/USD 1.32 again. The sovereign debt crisis remains the front-running issue on the markets.

As long as the ECB refuses to accept the role of “lender of last resort” the crisis will continue to simmer along. The simple reason for this is that Europe’s policymakercannot, even if they wanted to, take any measures which will have a strong enough direct effect to generate immediate results. In our opinion, the next episode of escalation will come in February by the latest, when Italy is scheduled to refinancesome EUR 36 bn in bonds and Greece will be facing elections with a highly uncertain outcome. The situation is rendered even worse by the fact that the economic data in the Eurozone will continue to deteriorate in the weeks ahead, whereas the USA will be enjoying a kind of mini-boom. We are confident that the EUR/USD exchange rate will thus hit our target of EUR/USD 1.30 by year end. The rate should then remain around this level through to March.

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