NewsEbury: Weekly FX Market Update

Wobbly stock markets trigger rush to safe-havens

Another week of risk asset sell-offs had a predictable effect on currency markets. The Japanese yen topped the week’s performance charts, followed by the US dollar. European currency stalled again, and commodity currencies like the Norwegian krone and the antipodean dollars fell sharply. Emerging market currencies fell against the US dollar, although they continue to more than hold their own against the euro, in a sign that rising commodity prices are still a driving factor in currency exchanges. The key concern driving markets is the extent to which central banks can bring inflation back in line with targets without serious damage to growth prospects. High-frequency data like US retail sales on Tuesday will take on added importance. Nevertheless, it will be a data light week and therefore communications from central bank officials will be in the spotlight. In addition to a slate of ECB speakers, watch out for the publication of the ECB April minutes. Meanwhile, the UK inflation print on Wednesday will be key for the pound.

The Czech koruna was on a rollercoaster last week. It sold off on Wednesday after a confirmation that Aleš
Michl will be CNB’s new governor only to rebound the following day on CNB intervention. In the end, it
managed to post gains for the week, outperforming its regional peers.
Last week’s inflation data surprised to the upside, with price growth reaching eye-popping 14.2% in April. Core
inflation surged to 12.8%, its highest level on record. Data surprises in Czechia fit with the regional pattern,
with all of the CEE countries we cover posting much stronger than expected price increases in April. Although
we’re likely nearing the top in inflation the data may force the CNB’s hand to raise rates again at the next
meeting before the start of Michl’s term as a governor. We’ll, however, have to wait for more data, including
May’s inflation print to make an accurate prediction.
Key economic print for this week – PPI data – was already released today and showed a stronger-than-expected
increase in producer prices in April. This may further add to the argument for a hike in June. In the coming days
we’ll keep waiting for any information about the personnel changes on the CNB Board as this will determine
the level of hawkishness the bank will exhibit from July and is therefore key for the koruna.

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