The Czech koruna rebounded from its two-month lows yesterday as the unit was boosted by FX intervention, which appeared on the Slovak market in favour of the neighbouring SKK. The EUR/CZK pair traded just below the 28.60 resistance, while it dipped to the 28.4 territory after the intervention. It is worth adding that the Czech currency was supported by a comment made as finance minister’s candidate Vlastimil Tlusty from the conservative ODS said that a forming coalition of the ODS, Christian Democrats and the Greens intended to reduce the budget deficit below 3% of GDP in 2008. This would still open a chance for euro adoption in 2008. Tlusty, however, refused to say whether the new government would actually aim to join the euro-zone in 2010. In this respect, we have to just repeat our view on the euro adoption in the Czech Republic: a combination of a weak government together with tough stance of the European Union in assessment of Maastricht criterions makes the euro entry in 2010 less likely. At the same time the coalition talks among the ODS, Christian Democrats and the Greens near its end as a draft of the coalition agreement should be finished this Friday. Interestingly, the coalition agreement should include a flat tax, despite an disagreement of the Social Democrats (CSSD) with this concept.
Hence, this lowers chances of the coalition in confidence, since the three parties have just 100 votes in the 200-seats parliament and one CSSD’s vote is needed. Today, the koruna will again turn its attention to the Slovak and Hungarian FX markets. Should bearish environment be reinforced on these markets, the EUR/CZK would probably bounce back above the 28.50 level.
ČSOB Investment Research