Risk assets worldwide understandably rejoiced. Stocks, commodities and credit all rallied, helped along by the
extremely stimulative settings in both monetary and fiscal policy. Currencies mostly followed suit, with
emerging market currencies putting in an excellent performance, and safe-havens underperforming. The dollar
fell against most of its peers, somewhat surprisingly.
As central banks in developed countries prepare to dial back the enormous monetary stimulus that is fuelling
inflation, there remains large uncertainties over the timing and extent of the removal. The Federal Reserve
(Wednesday), the European Central Bank and the Bank of England (Thursday) all meet this week. The Fed is
expected to sound hawkish, the ECB dovish and no one knows for certain about the BoE. The interplay
between these three institutions decisions, their communications and market expectations for those should be
key in what is shaping up to be a decisive week for currency markets.
After a muted trading in the first few days of the week the koruna staged a small rally, touching its three-week
high against the euro on Friday.
Newsflow from Czechia is quite positive of late. It seems that the recent Covid wave is passing as there is a
noticeable drop in the number of new cases: the 7-day moving average declined below 15,000. Economic
readings over the past few days have also been largely positive, particularly October’s retail sales and recent
labour market data. Inflation in November reached 6% and it was the first report since May which didn’t
surprise to the upside. All in all the data confirms expectations of further monetary policy tightening from the
CNB. Those expectations have recently increased again. Nonetheless, further hikes are likely to be much more
typical-size increases than the one CNB delivered in November.
This week we’ll focus primarily on the outside news. Both the Fed as well as the ECB meetings could have the
potential to stir things up a bit, which could also have an effect on the koruna.
Strong industrial production data out of Germany last week may have helped the euro stabilise against the US
dollar last week, but traders remain focused on the ECB meeting this Thursday. Market expectations are for a
very dovish central bank that expresses its willingness to continue buying bonds well into 2022, even as others,
particularly the Fed, taper their purchases much faster.
There is, however, some hope for the euro. Any disappointment of these expectations, either through a more
aggressive tapering schedule or perhaps the development of hawkish dissent within the ECB, could lead to a
sharp short covering rally.