The koruna declined as Czechs started voting in a general election, paring its weekly gain amid concern the vote will fail to produce a stable government.
The currency retreated 0.1 percent to 25.728 per euro by 2:07 p.m. in Prague, reducing its advance this week to 0.3 percent. Yields on Czech 10-year notes dropped one basis point to a two-week low of 2.33 percent and the PX equity index, which hit a seven-month high this week, gained 0.1 percent.
While opinion polls show the Social Democrats, who are advocating a shift away from fiscal-austerity policies, will win the most votes, some surveys predict the election will produce a fragmented parliament with a record seven parties. The Czech Republic’s low public debt, at half of the European Union average, has been comforting bondholders even as the country has been in gridlock since the collapse of Prime Minister Petr Necas’s cabinet in June.
“It is uncertain whether a stable government can be formed after the elections,” Michal Brozka, an analyst at the Prague-based unit of Raiffeisen Bank International AG, wrote in a report to clients yesterday. “This period of uncertainty is unfavorable from the viewpoint of the financial market.”
Polling stations across the central European country with a population of 10.5 million are open between 2 p.m. and 10 p.m. today and 8 a.m. and 2 p.m. tomorrow.
While Necas’s three-year austerity program contributed to six quarters of recession, it boosted the appeal of Czech sovereign bonds. The post-communist nation has the highest credit ratings in central and eastern Europe, along with euro-member Estonia, and the cost of insuring its bonds against non-payment is the lowest in the region.
Czech credit-default swaps rose one basis point to 60, compared with 61 for higher-rated France. The sovereign’s public debt stands at 46 percent of gross domestic product, the lowest after Luxembourg and Sweden and tied with Denmark among the 17 richest EU members, data compiled by Bloomberg show.
The Czech currency rallied 0.5 percent yesterday, the most among 31 major peers tracked by Bloomberg, as an index of Czech economic confidence rose to a two-year high. The koruna’s volatility against the euro over the past week has been 4.9 percent, the highest after Iceland and Turkey among 13 emerging European currencies tracked by Bloomberg.
Budget-deficit cuts implemented by the Necas administration and low Czech bond yields are limiting the potential market impact of the elections, analyst Jan Bures at CSOB AS in Prague wrote in a report to clients today.
“Czech parliamentary elections have rarely produced any turbulent reaction on the koruna,” he said. “This year’s vote will be among the traditionally calm ones.”