Bloomberg News

Koruna Weakens Most in Three Weeks on European Slowdown Concern

October 03, 2011

Oct. 3 (Bloomberg) -- The koruna weakened the most in three weeks against the euro on mounting concern Europe’s debt crisis will curb growth and hurt demand for Czech exports.

The Czech currency slid as much as 1 percent, its biggest intraday retreat since Sept. 9, and traded 0.8 percent weaker at 24.872 per euro by 4:12 p.m. in Prague.

European stocks fell and the cost of insuring German bonds rose to a record as the European Union’s finance chiefs meet in Luxembourg to weigh the risk of a Greek default. Koruna losses were deepened by automatic stop-loss trades set up by investors who bet on the currency’s gains, according to David Sykora, head of foreign-exchange trading at CSOB AS in Prague.

“There is a lack of confidence in the euro, disagreements inside the European Union, basically the same reasons again and again,” Sykora said. “The Czech Republic is strongly affected by problems in the EU, the main market for our goods. If demand declines, especially in Germany, Czech exporters’ sales will rapidly drop and this will hit the economy very hard.”

Czech manufacturing rose at the slowest pace in 21 months in September, according to an index of purchasing managers released today. The HSBC Czech Republic Manufacturing PMI fell to 52.3 from 53.4 in August, the bank said in a report. Exports account for nearly 80 percent of Czech gross domestic product, with neighboring Germany being the biggest trading partner.

Investors in Czech interest-rate derivatives raised bets funding costs will drop after minutes from the central bank’s Sept. 22 policy meeting, published on Sept. 30, said risks to its economic forecast are tilted “significantly” toward lower interest rates as spending cuts abroad may curb Czech exports.

Interest Rates

Forward-rate agreements fixing three-month interest in nine months fell to 0.995 percent today from 1.000 percent yesterday and 1.78 percent three months ago. A close at that level would be the lowest mid-price since Bloomberg began tracking the data in 1997. The nine-month FRA traded 17 basis points below the three-month Prague Interbank Offered Rate, to which it settles.

Policy makers on Sept. 22 left the benchmark rate at a record-low 0.75 percent, half of the European Central Bank’s main rate, and signaled they may ease policy as the euro area’s sovereign-debt crisis worsens the economic outlook and intensified downside inflation risks.

“We believe the CNB will opt for additional monetary easing, which is likely to translate in some koruna weakness,” emerging-market strategists at BNP Paribas SA led by Bartosz Pawlowski in London wrote in a report to today. “We like to play the upside of the new range between 24.55 and 24.95.”

--Editors: Linda Shen, Peter Branton

To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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