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Market Analysis

Fundamental Analysis: Better PPI Boosts the Koruna

March 18, 2019
BY Michael Stark

The Czech koruna appreciated somewhat this morning against most major currencies. PPI data was the main catalyst of the move gaining strength, but mostly better data from the eurozone last week has also played a role.

The koruna reached a fortnight high below 22.60 Kč to the dollar in the mid morning GMT. CZK also made gains against the pound below 29.90 Kč, although volatility for GBPCZK has understandably been high. The euro meanwhile posted only a small loss to around 25.63 Kč.

Stronger PPI and less concern from trade partners

The key figure from the Czech Republic this morning was annual PPI. This has now risen to 3.6%, over half a percent higher than the previous release and slightly above expectations. Although the Czech current account surplus was slightly lower than the consensus, monthly PPI also came in higher than expected.

Today’s news comes in the context of Czech data this time last week also being quite positive. Annual CPI rose to 2.7%, above both the previous release and the expectation. Monthly CPI for February also beat the prediction. These as well as today’s releases might even be factors in favor of another rate hike in the second quarter of 2019.

The koruna tends to react strongly to industrial data from other EU nations because the Czech economy relies heavily on exports to these countries. Czech machinery, engineering equipment and so on are likely to be in higher demand as the EU’s economies strengthen.

Last week’s data from the eurozone was mostly positive for CZK, then. German industrial data last Monday was a bit negative, but not quite as bad as some feared. British data on Tuesday also came in surprisingly positive considering Brexit, a good thing for CZK against the dollar.

Rates also remain a fairly supportive factor for the koruna. The Czech National Bank (CNB) made no less than five hikes last year to the two-week repo rate, taking it from 0.5% to the current 1.75%. The speed of hikes does appear to be justified based on economic data, and increasingly there is demand for carry trades involving CZK.

German data and the Fed in view this week

No significant data is due out from the Czech Republic this week. However, some German releases are very important for traders of the koruna. Both economic sentiment tomorrow at 10.00 GMT and manufacturing PMI on Friday have significant potential to drive movement for CZK.

The main event in currency markets on the whole this week is the Fed’s rate decision on Wednesday night at 18.00 GMT. Although no change is expected, comments from the Federal Open Market Committee are likely drive large short-term volatility in most forex pairs.

The final important releases for the koruna this week are eurozone manufacturing data on Friday morning. Although it’s unlikely that traders will face major surprises here, nonetheless they should still pay attention to these releases.

Some more gains likely for CZK

Fundamentals in general are likely to remain supportive for the koruna this week, leading to further strengthening against most majors. However, traders should be prepared for high volatility around the Fed’s meeting on Wednesday night.

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