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The koruna opened weaker yesterday on slight dollar gains during weekend

30.3.2005 10:17
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As usual, the koruna followed the regional mood. The market almost wasn’t touched by deepening government crisis. Thus the unit followed the zloty and touched the new 3-month low of EUR/CZK 30.27 in the morning. Later on, it sharply rebound and returned to the opening level of 30.14, as the dollar failed to penetrate 1.29 level and traders found the koruna cheap. Nevertheless, the koruna lost afternoon’s gains at the end of the day to close slightly weaker at 30.20. The CZK should be nervous today because the lingering government crisis proceeds to the final.

A junior coalition partner, Christian Democrats, may decide to leave government tonight, because the Social Democrats refused to replaced prime minister Stanislav Gross. Thus the whole dispute is currently deadlocked because it is hard for the Christian Democrats to give up its requirement without losing face. Even so the continuation of the government coalition in its current composition (the Social Democrats, the Union) is a possible variant. However, more likely variant is that the Christian Democrats will leave the government tomorrow. Since the right-wing opposition Civic Democrats called a no-confidence vote to be held on Friday April 1, current Gross’ government may fall under such condition at the end of the week. The Civic Democrats, the Communists and the key Christian Democrats are expected to vote against the government.

There are four scenarios of further development: First, the same coalition with a new prime minister. Second, a minority government of the Social Democrats supported by the Communists. Third, an agreement of main parties on early elections. Finally, three unsuccessful attempts to form government will lead to early elections. Thus the situation does not look simple, and therefore none of the outlined variants is likely to be chosen quickly.

Hence domestic political events will not provide favourable climate for the koruna in the days to come. Thursday’s expected rate cut will not encourage the koruna either. Hence only an improvement in the regional mood could lift the koruna.

(CSOB - Investment research)

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