Safe-havens like the Japanese yen and Swiss franc outperformed last week, as the unambiguously hawkish statements from Fed chair Powell added to the uncertainty over the impact of the omicron COVID variant and sent risk assets tumbling worldwide. A mixed jobs report out of the US did little to steady nerves in equity and credit markets, though moves among major currencies were of modest size. The dollar put in a mixed performance, and there was no clear theme among emerging market currencies, which ranged from a 2% gain by the Mexican peso to yet another weekly collapse of around 10% by the Turkish lira, slammed by Erdogan’s increasingly erratic policies.
The Czech koruna regained a portion of its recent losses last week, edging up by approximately 1% against the euro. The currency rallied alongside regional peers and a number of other EM currencies, but some of the really seems to be related to an increase in bets regarding monetary policy tightening in Czechia after their previous decline. The positive news is that the recent Covid wave in the country might be peaking as the 7-day moving average of new infections was relatively stable throughout the past week and actually started to decline. This should support the koruna moving forward as it removes one of the potential stumbling blocks to higher interest rates in Czechia. Nonetheless, developments on the Covid front would still need to be watched carefully, particularly considering the discovery of the omicron variant which has already stirred the market sentiment.
The common currency has held up surprisingly well through two weeks of risk aversion and hawkish noises from the Federal Reserve. The massive upward surprise in Eurozone November inflation last week should make President Lagarde’s extreme dovishness increasingly untenable.
The 21.9% print in October producer price inflation all but guarantees that inflation levels will not be coming down anytime soon, as those price pressures bubble up through the supply chains to the final consumer. Of particular note should be the German HICP inflation number of 6% in November. We expect some hawkish pushback against Lagarde’s dovish line to emerge soon in the wake of these ugly numbers, and remain of the view that ECB interest rate hikes cannot wait until 2023.