Czech crown mired at 9-mth lows

...status as a funding currency for investment in high-yielding asset markets.

The crown traded at 28.525 per euro by 0915 GMT. On Tuesday it slipped as low as 28.550, its weakest level since mid-September 2006, deepening its losses since hitting lifetime peaks in late December 2006 to nearly 4 percent.

The market ignored the central bank's comment on Tuesday that renewed pressure for "excessive appreciation" in the crown cannot be ruled out, as the record 125 basis point gap between Czech and higher euro zone rates dampens the crown's allure.

"The outlook on Czech rates is blurry, leaving the crown in a state of confusion," BNP Paribas said in a report to clients.

"Some recovery remains possible as the funding currency status of both the Swiss franc and the Japanese yen is less clear-cut amidst a backdrop of rising inflation across the board. Yet for now we would stick to long euro/crown positions however for a move to 28.60," they said.

The Czech Republic has the lowest interest rates in the European Union, which it joined in 2004, in spite of a quarter of a percentage point interest rate rise to 2.75 percent in May to tame price pressures stemming from fast economic growth.

However, views of policymakers on the central bank board have been split over whether the outlook for robust consumer-led economic growth to continue and inflation to top 3 percent this year warrants an urgent credit tightening.

In the debt market, investors were preparing for an inaugural auction of the new 15-year benchmark bond, the 4.70 percent coupon bond due in 2022. Bids for 7 billion crowns ($326.8 million) worth of the paper are due by 1000 GMT.

While some analysts said long-dated Czech bonds appeared attractively priced compared with local-currency financing from the money market, others cautioned the bearish global environment could leave the auction poorly bid.

----------------- MARKET SNAPSHOT AT 0918 GMT ----------------- Crown/euro last deals at 28.525 (-0.04 pct) Crown/dollar at 21.460 bid (-0.32 pct)

5-year yield due Oct 2010 3.97 pct bid (+4 bps) 10-year yield due Jan 2016 4.36 pct bid (0 bps)

5-yr CZK/EUR mid yield spread -66 bps (vs -64) 10-yr CZK/EUR mid yield spread -32 bps (vs -26)

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