Czech crown retreats, mkts eye fiscal reform vote

...reforms and watching global investor sentiment towards riskier assets.

The crown traded flat from Monday's domestic close at 27.620 per euro by 1000 GMT, having retreated from late Monday's high of 27.540.

The lower house of the Czech parliament was due to convene at 2 p.m. (1200 GMT) for a final vote on an overhaul in taxes and benefits, which will be watched closely by markets because the cabinet has staked its future on the plan's fate.

"This will likely have only limited impact on markets. If the government's bill falls through, the crown might come under selling pressure, but this now looks very unlikely," said Lubos Mokras, analyst at Ceska Sporitelna.

Prime Minister Mirek Topolanek has united his center-right coalition behind the bill, making the reforms' approval with the help of two renegade opposition deputies almost a done deal.

The crown rallied last week along with the Japanese yen as investors fled riskier assets such as equities and pared carry trades, in which they sold low-yield currencies like the yen and crown to fund purchases of higher-yielding assets elsewhere.

The carry trade unwind sent the crown to 7-1/2-month highs of 27.460 per euro late last week, within sight of a lifetime peak at 27.410 reached late last year and again early this year.

"The euro/crown is dependent on the carry trade theme and its vagaries remain indeed very much correlated to the euro/yen moves and the relationships is unlikely to break down unless the emerging markets/liquidity turmoil starts to degenerate," said Elisabeth Gruie, currency strategist at BNP Paribas.

"We still expect some further upside correction in the euro/crown in the course of the week but Monday's price action illustrates that we could just ease towards new all time lows."

Forward money market rates and short-term swap rates inched up on central bank (CNB) Governor Zdenek Tuma's comments confirming the CNB was sticking to its hawkish bias despite the crown's 4 percent rally since early July.

"The CNB may be underestimating the situation on global markets, which may influence monetary policy through a rise in the crown," said Jan Cermak, analyst at CSOB bank.

"The re-pricing of risk is helping the crown and a firmer crown lessens inflation pressures. On the other hand it is true that the medium-term inflation outlook is unfavourable and a strong currency could come in handy."

For report on Tuma's comments, click on [ID:nL21823970].

[PRAGUE/Reuters/Finance.cz]