Dawn: The contagion in the Czech Republic is spreading rapidly, the koruna is weakening and a negative CNB scenario may occur

The Czech National Bank can be satisfied. The koruna is visibly losing in the last week and has approached the levels assumed by the central bank’s latest forecast. The problem is that, in addition to declining stock markets, the rapid growth of those infected in the Czech Republic is to blame.

The second wave of the pandemic not only returns the koruna to the level of the forecast, but at the same time can significantly stir up the entire economic outlook. If we see a further intensification of quarantine measures in the coming weeks (for example, closures in shopping malls and restaurants), an alternative “pessimistic” scenario of the CNB may arise, in which the koruna should be even weaker….

While in Europe, the focus will be on the growth of newly infected countries in countries where the second wave is starting fast. Apart from the Czech Republic, this is especially the case in France, where daily increments attack 10,000 newly infected.

In the United States, investors will be watching the Fed’s meetings in particular. We should learn the details of the strategic change in monetary policy that Jeremy Powell announced at the Jackson Hole Symposium. The key change is the transition to average inflation targeting. This means that after periods of low price growth, the Fed should tolerate overshooting the inflation target for some time. The period of lower and higher price growth would thus be compensated.

What matters is how long the “moving inflation average” that the Fed will target will be. In general, the longer it will be, the longer the implications for monetary policy. The move to a truly long multi-year average could significantly change the Fed’s forecast and projected rate trajectory. How much the attitude of the central bankers themselves will change in the light of the new approach. After all, we will see immediately in the updated forecast (specifically the new dots plot chart).

MARKETS
CZK and bonds
The growing number of infected and unconvincing performances of stock markets keeps the koruna on the defensive. At the end of the week, the Czech currency remained around 26.50 EUR / CZK. The crown will not wish the risk of stricter quarantine measures and speculation that the Czechs will also include neighboring Slovakia in the group of risky countries. The calendar of domestic events is relatively empty this week and the markets will look forward to the CNB meeting next week.

Foreign forex
The ECB tried to cut the euro dollar last week, which it did not quite manage. This week, she will be at the US Federal Reserve on Wednesday to return the blow. The Fed will present a new consensus forecast, but the question is whether, after the recently outlined revision of the monetary policy strategy, it will really come up with something new. However, the FOMC meeting will not be until Wednesday – until then, the market will monitor incoming data (today, for example, the industry in EMU), while the euro in particular must also take into account the events surrounding Brexit.

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