Czech Republic

Czech economic growth fell by “only” 4.1% last year


Poland

Zloty waits important domestic macro readings


The Week Ahead

The Polish inflation and IP figures take the lead


Overview

Is The Czech Koruna Set for a Strong Appreciation?

Last week, it was the koruna, among CE currencies, which was encouraged by two highly positive data releases and finally outperformed the regional peers. Firstly, the GDP revision showed that, owing to exports, the Czech economy was growing for the second consecutive quarter at the end of the year. In addition, January’s figures indicate a surprisingly strong current account surplus. Thus the economy is recovering, while continuing to improve its external balance. This is an perfect combination for the koruna.
Furthermore, foreign trade (stagnating imports, recovering exports) is not the only reason for the external balance improvements; transfers from EU Structural Funds are also starting to rise to a reasonable degree, although these have played just a very limited role in recent years. However, January’s contribution was CZK 6 bn. Moreover, the situation will continue to improve in the future. Applications for the use of Structural Funds totalling CZK 789 bn (21% of GDP) have been filed in the Czech Republic at the moment, with projects totalling CZK 311 bn (9% GDP) already approved. Much of this money will flow to the Czech Republic within the next three years, and may significantly improve the external balance. While the money will be converted through the central bank, rather than directly through the market, it should have an indirect positive effect on the Czech currency. The reason is that the central bank will probably not wish to increase its forex reserves at such a fast rate, and therefore the bank itself will want to sell some of the euros on the market. However, even if the bank accumulates all of the euros and decides to print money instead of them, the strong monetary expansion could make the Czech National Bank raise rates more rapidly in the future. This would not be favourable for the koruna too.
By and large, the future of the koruna looks promising, unless public finances affect it, as investors and rating agencies are eagerly waiting to see how a new government will tackle the troublesome public finances after May’s parliamentary elections.