Czech crown slips from 7-1/2-mth high, market edgy

...an unwinding of crown-funded carry trade positions.

The crown fell from a high of 27.460 per euro to trade at 27.615 by 1025 GMT, as the firm levels attracted some sellers. On Thursday, the crown shot up from 27.875 to the euro in the currency's biggest daily jump in more than 2-1/2 years.

Distress in global credit markets has led investors to pare or close mostly risky bets in high-yield assets financed by borrowing in low-yield currencies, boosting the funding vehicles like the Japanese yen [USD/] and the Czech crown.

The rally has pushed the crown to levels which 14 market watchers in a Reuters poll taken this week did not forecast until six months from now [CZK/POLL].

Dealers and analysts said the crown might still correct more. However it could reverse into higher territory again if the global flight from risk sparks more trimming of carry trade positions.

The Prague bourse extended its fall to five-month lows as the main index shed 1.1 percent on Friday after the previous session's sharpest one-day drop in 15 months [.CEE]. Emerging market stocks fell 1.3 percent .

"If the global carry trade unwinding continues, the crown may well decouple from the yen or the Swiss franc, low-yield currencies whose moves the Czech crown has seemed to mirror, and appreciate somewhat less," said one London analyst.

The crown is up 4.2 percent versus the euro since the start of July. The yen has surged 9.4 percent to the euro .

"You don't have too much uncertainty over the cost of your funding in Czech money markets and you don't have banks fretting about potential counterparty default. Czech money markets appear to be functioning smoothly," the analyst added.

Central bank (CNB) Vice-Governor Ludek Niedermayer said the CNB was not worried by the effect of world financial market turmoil on its local market and the country is safe from fallout from the subprime U.S. mortgage sector [ID:nL17558175].

Overnight deposit rates traded at 2.92/3.02 percent on Friday, level with the CNB's policy rate of 3.0 percent. Three-month deposit rates were at 3.22/3.30 percent , at five-year highs.

[PRAGUE/Reuters/Finance.cz]