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The equal balance of 100:100 between center right and left parties pushed the Czech currency under downward pressure yesterday

6.6.2006 9:48
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The election deadlock (see the News section), due to the equal balance of 100:100 between center right and left parties pushed the Czech currency under downward pressure yesterday, which slipped to a three-weeks high. The koruna began to weaken right after the opening as investors were unhappy with the election results, which imply either weak government or early elections. On the other koruna’s losses were still rather limited since the unit lost less than one percent against the euro.

The explanation of such a modest (negative) reaction lies in strong Czech fundamentals, which should not be hurt even by short-term political instability. The CZK eases on election results. The market will definitely monitor a development on the political scene these days, but we do not expect the political deadlock will be resolved quickly. Leader of the winning party ODS, Mr. Topolanek, has a right to for a government, however, until it is clear that he will get a tacit support from its political enemy – the Social Democrats- we will hardly see any progress on the political front. That is why the koruna might turn attention back to domestic fundamentals and developments in core and emerging markets.

The former has contained a release of the April foreign trade, which surprised slightly on the downside as the surplus reached just EUR 0.2 bn, while the previous (positive) figure was revised downward. In our view the above data should be neutral or slightly negative for the koruna. In the latter case we have to warn that yesterday’s comment coming FOMC Chairman Bernanke might push emerging markets lower, so the koruna can extend its losses. Nevertheless, we do not believe the EUR/CZK should jump above the 28.45 resistance.

(CSOB - Investment research)

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