The Slovak koruna stuck in a sideways range moving between the 38.15 and 38.30 area waiting for fresh impetus. Robert Fico, chairman of SMER announced yesterday he wanted to form the new government with SNS (Slovak Nationalist Party) and HZDS (Movement for a Democratic Slovakia) led by former Prime Minister V. Meciar. The koruna lost 15 hallers in an immediate reaction, because such formation is viewed as the most risky for the economy. The biggest risks represent possible changes into the recent tax reform, pension system and increases in the public finance deficit.
This combination would also evoke the greatest danger for euro adoption in 2009. We expect volatile trading today with potential of further koruna weakening. Nevertheless, potential losses should be limited as we assume the central bank will defend the unit at around 38.55-38.60 (levels at which it intervened last week). From a longer term, there is more room for currency depreciation as the uncertainty will linger until the new government has introduced its fiscal policy programme. Slovak koruna under pressure as worst-case post-election scenario materializes.
(CSOB - Investment research)