Look To Buy Euro Vs. CZK

The euro has slumped around 4% against the Czech koruna since November 2nd. The news stream from Czech Republic has not been that supportive, giving the impression that koruna is being lifted by generalized factors.

This has been a particularly difficult year for Czech politics. Recall that its government collapsed while holding the rotating EU presidency and jockeying for advantage had it challenging the Lisbon Treaty. Now, Prime Minister Fischer has nominated the central bank governor Tuma as the country's next EU commissioner. Domestic political considerations seem to be behind the nomination. Fischer was previously under pressure to take the post himself but now may see this as an opportunity to deal with a political adversary and to give him the ability to name a new central bank governor. On the other hand, some opposition parties insist that Fischer takes the commissioner post and that would necessitate a caretaker government until elections can held next May-June period.

Czech will reported a series of economic data in the coming days. The week's releases kicked off today with Oct unemployment (8.5% vs 8.6% Sept) and Oct CPI (-0.2% month-over-month and year-over-year vs -0.4% and 0 respectively in Sept). Sept data (industrial production, construction output and retail sales) are due out in the next few days, but the highlight will be the preliminary Q3 GDP report on Friday. The early consensus expects a 4.7% contraction (seasonally adjusted year-over-year) compared with the 5.5% contraction in Q2 and 4.5% contraction in Q1. It will be the third consecutive quarterly contraction.

The euro has fallen through the pre-weekend lows seen near CZK25.63 near the retracement objective of the euro's rally since mid-September. The next level of support is seen in the CZK25.50 area. The hourly momentum indicators are showing bullish euro divergence, suggesting a low may be in place. The first test on the upside comes in back at Friday's low and then CZK25.70. Look for a near-term bounce in the euro. The structure of the bounce will indicate whether it is simply a correction or the beginning of a new rally in the euro.