Yesterday developments clearly showed that the Czech politics could be far from boring. While it had seemed in the afternoon that there would be ODS-led conservative minority government supported by the second biggest party – the Social Democrats (CSSD) - development in the afternoon changed everything. The CSSD made a strategic move and walked away from talks with the ODS. Instead, CSSD leader started consultations with the Christian Democrats to form a minority cabinet that would rely on support of the Communists (note that CSSD together with the Christian Democrats have only 87 mandates in 200-members parliament. What was even more surprising that Christian Democrats, who had denied any form of cooperation with the Communist party, changed their position and now they are ready to join the cabinet that would be supported by the former enemy. So what next? ODS leader Mirek Topolanek has still a mandate to form a cabinet. He can try it but the ODS does not have simply enough vote either to win confidence vote or push for an early-elections scenario. Hence, the result could be only a minority government of the CSSD and Christian democrats with tacit support of the Communists (such a coalition will have 113 mandates in the parliament).
What are the implications for the Czech koruna? They are clearly negative since any cabinet relying on support of Communist will not have a chance to cut costly spending programmes approved before elections. Hence the koruna will stay probably under downward pressure which it has already witnessed. So it is worth recall key supports for the koruna, they stand at EUR/CZK 28.29 and then at 28.38. How strongly will EUR/CZK feel turbulences in the domestic politics?
(CSOB - Investment research)