Dollar Rebounds Against Koruna As Czech Fundamentals Show Strain

Currencies 

The Trumpflation rally in the US dollar of the final months of 2016 has given way to losses versus the Czech Koruna since the outset of 2017 as a questionable fundamental outlook underpins the most recent losses. The greenback remains under pressure as financial markets now only anticipate two rate hikes during the 2017 calendar year compared to the three projected during the December FOMC decision. However, with the dollar roaring back to life after the latest payrolls figure, the Koruna has seen losses escalate as local fundamentals suggest that difficulties lie ahead.

Following a retail sales report released on Monday, the Czech Koruna has found itself under immense pressure, not helped by the rebounding US dollar after last week’s payroll data.Despite the Federal Reserve being mum on the outlook for monetary policy, comments from San Francisco Federal Reserve President have spurred the idea that the March meeting could very well be “live” from the perspective of adjusting policy. By contrast, the Czech Republic is unlikely to adjust interest rates in an effort to keep the Koruna competitive at a time when neighboring Euro Area interest rates are ebbing at 0.00%.

Robust Fundamentals Not Enough to Stop Koruna Slide

After a steep appreciation since the start of the new year, the rapid ascent of the Czech Koruna is finally showing signs of pulling back and even possibly reversing over the coming days and weeks.Looking at the Czech economy overall, it is evident that the country’s fundamentals are still strong on a headline basis.Inflation is trending near 2.00% while unemployment is half the comparable Euro Area rate. Nevertheless, even when bolstered by decent GDP growth, the policy outlook is expected to remain stable for at least the rest of 2017, with interest rates staying on hold at 0.05%, marginally above the 0.00% in the neighboring Euro Area.

Complicating the outlook is the fact that Czech quarterly growth printed at 0.20% during the third quarter, the slowest pace of expansion since 2014. The main culprits of this weakened growth was lower government expenditures combined with weakening export demand which weighed heavy on the figure. When taking these factors in tandem, there is little chance of an imminent rate hike unless growth experienced a dramatic pickup during the fourth quarter, bring inflation higher as well. By comparison, the United States is on the path to raising interest rates in the relatively near future, helping fuel potential dollar gains over the medium-term despite the market reservations.