Czech crown up, seen firming on flight from risk

...investors' risk appetite and led some to pare crown-funded carry trades.

The crown inched as high as 28.069 per euro . By 0800 GMT it was back at 28.110, near Thursday's closing levels, with dealers and analysts saying the market was likely to test the 28.0 psychological level.

The crown is up 2.4 percent since early July.

Turbulence in global equities and credit markets has caused investors to shy away from risk and unwind carry trades, triggering a rise in low-yield currencies which have been used to fund such bets in high-yield markets.

Low Czech rates, at 3 percent the lowest in the European Union, have attracted investors into the crown as a cheap funding vehicle, causing it to decouple from neighbouring central European currencies.

"We would look for the crown to test the 28.00 level in the near future if the recent action can be sustained, and movements in yen a good guide," said Lauren Van Biljon, an analyst at 4Cast Limited in London.

"It's all about the global scene, and the worries on credit and equity market inevitably translate into good news for low-yielding currencies like the yen and the crown as carry trades unwind."

In the Czech money market, liquidity was abundant and ultra-short deposit rates held near the central bank's 3 percent target following a minor spike higher in what dealers said was a technical move on Thursday.

"There is an extreme surplus of liquidity," said Martin Broz, head of money market desk at the largest Czech bank CSOB.

He said the market was unaffected by liquidity problems in the neighbouring euro zone, where conditions were tight despite the Europeran Central Bank's record injection of 95 billion euros to calm panicky markets on Thursday.

The Czech central bank usually drains tens of billions of crowns away from the open money market through repo operations carried out three times a week to keep the market in balance.

It forecast a liquidity surplus of 79.8 billion crowns ($3.91 billion) before Friday's scheduled two-week operation .

[PRAGUE/Reuters/Finance.cz]