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.

While financial markets were disappointed that the Federal Reserve left few breadcrumbs during its latest FOMC decision, there are some signs that the Central Bank may forge ahead with additional tightening measures. Despite Fed Funds futures not projecting any changes until summer, San Francisco Fed President John Williams remarked on Friday that inflation is moving back towards 2.00% and that March could very well be a “live” meeting. Nevertheless, alongside his hawkishness, he did reiterate that the Fed will remain data dependent, setting up the dollar for a rollercoaster ride until the next decision in less than 6-weeks.In the meantime, the projected divergence in interest rates could be enough to send USDCZK back towards highs last seen over a decade ago.

Koruna Selloff Accelerates

Following a significant strengthening over the last four weeks, the Koruna appears to be experiencing slowing momentum. While part of this can be attributed to demand for the US dollar, it may be a sign of continuation of the prevailing trend higher. Based on the upward trend that began during the summer months, USD/CZK is sitting well within the technical parameters of a 30.00-60.00% correction that is indicative of trend continuation. The pair has found support near the 38.20% Fibonacci level, bouncing back higher and suggesting a potential reversal following the most recent pullback.

The main bearish momentum has been in the form of a downward trending equidistant channel formation that emerged start of 2017. The key is to see whether the upper channel line holds up from the most recent rally in prices. Should prices manage a candlestick close above the upper channel line, it could indicate a channel-based breakout higher. If this occurs, the next major level to watch on the upside is the 50-day moving average trending near 25.5000. However, if the upper channel line holds up, a retreat towards the lower channel line and the 200-day moving average corresponding at 24.6000 is likely.

What Binary Options Traders Should Watch For

Although most of the pertinent economic data over the coming weeks will be related to the United States, data will be largely absent until the following week when the US reports inflation for January and the Czech Republic publishes an advance reading of fourth quarter GDP figures. Although growth is expected to pickup modestly in the Czech Republic, with forecasts calling for 0.30% for the period, any disappointment could send the Koruna lower against the dollar. By comparison, any indications that US inflation momentum is cooling could cause a decline in USD/CZK. However, with the most recent pullback largely in line with technical analysis conventions, a rebound and continuation of the prevailing upward trend may very well be imminent.