The Czech koruna completely decoupled from the region and weakened yesterday as the new Czech Finance Minister Tlusty ruled out entering the pre-euro ERM-2 exchange rate mechanism in 2007, so the previous official target for euro entry was out of question. Moreover, Tlusty added that the true fiscal deficit would reach 4.6% of GDP in 2007, if no cutting measures are approved.
Recall that the previous government planned a budget with the 3.3 % of GDP deficit but this positive result should be reached thanks to privatization revenues and still not approved cuts on the spending side. So, Tlusty sent several negative signals to the market and the EUR/CZK moved significantly north. At the end of the session the pair even tested the EUR/CZK 28.38 resistance. EUR/CZK moves higher as hopes for early ERM-2. disappear. Today, the negative sentiment triggered by yesterday’s comments coming from new Finance Minister should prevail.
Latter on, the focus should be on a release of the July C/A figures. We do not think, however, the headline figure should move with market. We do not expect, however, that the huge deficit posted in June (CZK -36 bn) will reoccur; we believe that the deficit will be approximately half that figure. The current account figure will particularly depend on the development of the balance of income, which slipped into significant deficits during the summer, when enterprises under foreign control paid out dividends. The balance of income as well as the entire current account should, however, stabilize over the next few months.
(CSOB - Investment research)