Czech crown extends rally, cuts rate hike scope

...consecutive session on 
Friday, extending a rally which analysts said reduced the scope 
for further interest rate hikes to contain resurgent inflation. 
    The crown has been gaining strength from a robust economy 
expanding at about 6 percent clip for the third year running, 
which together with a surplus trade balance tends to spur fund 
flows from investors seeking a safe haven in periods of risk 
aversion. 
    The crown's upswing mirrored this week's surge across 
central European currency markets, driven by the U.S. dollar's 
slide to record lows and growing hopes of a market-friendly 
outcome to weekend's election in neighbouring Poland. 
    "Given the favourable macro backdrop and a trade balance 
surplus, it is quite logical the crown has room to firm," said 
one Prague-based dealer with an international bank. 
    "The region is still sexy in a way, and if we closed 2006 at 
27.5 per euro, we may be in for ending 2007 at a firmer level, 
say around 27.0," he added. 
    The crown firmed as high as 27.260 against the euro, above 
the previous peak of 27.310 hit on Thursday, as weaker equities 
and persisting credit concerns fuelled risk aversion and stoked 
a bid for safe-haven assets globally. 
    The crown traded at 27.330 per euro  by 0805 GMT. 
    It has risen nearly 5.5 percent since July, wrongfooting the 
central bank's outlook for stability around 28.2 to the euro and 
dampening inflation pressures stemming from strong demand growth 
more than policymakers had expected. 
     
    RATE HIKE PROSPECTS FADE 
    Fading expectations of a quick rate hike due to the rallying 
currency helped knock forward money market rates  from 
five-year highs. 
    The 3X6 FRA rate , showing where investors expect 
three month lending rates to be in three months' time, shed 4 
basis points. 
    The central bank (CNB) raised interest rates to a five-year 
high of 3.25 percent in August. However, policymakers have 
pointed to a diminishing scope for more rate hikes due to the 
strong crown and uncertainty fed by the global credit crunch. 
    A majority of analysts in a Reuters poll [CNB/INT] expect no 
rate change next Thursday when policymakers will review policy 
and discuss the quarterly forecast update taking into account 
the crown's firming. 
    "It will be difficult for officials at the central bank to 
call for raising rates," said David Navratil, analyst at Ceska 
Sporitelna, who sees a next rate rise delayed until the first 
quarter of next year. 
 

[PRAGUE/Reuters/Finance.cz]