Czech crown hugs range,seen weaker on carry trades

...watchers have taken a bearish view for the near-term because of the currency's deep yield disadvantage. The rate discount versus the European Central Bank's policy rate will widen to 150 basis points within three months if the ECB hikes to 4.00 percent by June and the CNB stands pat until at least July as markets widely predict.

The crown gained a quarter of a percent to trade at 28.000 per euro by 1220 GMT. Government debt yield spreads versus euro benchmarks tightened but remained below the euro zone levels across the curve, bar the longest-dated paper.

The central bank (CNB) held interest rates steady for the sixth month running on Thursday and policymakers made clear they were in no rush to raise the main repo rate from 2.50 percent.

The low yield has turned the crown into a funding currency such as the Japanese yen or Swiss franc, making it profitable for investors to sell cheap crowns for higher-yielding assets in other emerging markets with a view to reaping the yield spread.

"With short rates at a 125 basis point discount to those in the euro zone, there is little merit in being long crown and we continue to advocate our sell CZK/PLN trade ," said Calyon analyst Nigel Rendell.

Goldman Sachs forecast a weaker crown within the next three months, and Commerzbank said it expected the currency to slip to 28.30 by the middle of the year.

On the domestic front, markets will focus on Monday's government announcement of a fiscal austerity package which is expected to involve curbs on bloated social transfers and a sales tax hike to be partly offset by a cut in income taxes.

For details of planned fiscal overhaul, see [ID:nL26523666].

"The CNB showed it remains in no hurry to hike interest rates ... That's arguably negative for the CZK, which is used as a funder, but next week's government plans and trade numbers should provide an offset," said Lucy Bethell at Royal Bank of Scotland.

----------------- MARKET SNAPSHOT AT 1220 GMT ----------------- Crown/euro last deals at 28.000 (+0.29 pct) Crown/dollar at 21.009 bid (+0.05 pct)

5-year yield due Oct 2010 3.40 pct bid (+3 bps) 10-year yield due Jan 2016 3.85 pct bid (+2 bps)

5-yr CZK/EUR mid yield spread -65 bps (vs -67) 10-yr CZK/EUR mid yield spread -20 bps (vs -21)

Current levels versus prior domestic close at 1500 GMT ---------------------------------------------------------------