Emerging FX-C.Europe slips off highs, seen ignoring politics

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Central European currencies slipped on Friday as a Czech coalition impasse highlighted the region's political worries but the events were seen only as an excuse to book profits off a run to multi-month highs.

The Czech crown hit a record high of 27.625 per euro before retreating half a percent , broadly shrugging off the collapse of coalition talks. This makes likely early elections or a weak government backed by defectors.

This is the latest in a series of political crises that have dogged the four largest new European Union members in 2006 but the impact has always been shortlived as investors focus more on the convergence story and booming economic growth.

In Poland, markets digested news that the central bank governor nominee had withdrawn his candidacy but the zloty edged only marginally off nine-month highs against the euro.

Analysts say politics will not deter cash seeking outlets before 2006 ends and central Europe is being lifted by investors positioning for good growth in the region and the euro zone.

"Czech politics have been pretty much shrugged off this year as the economic fundamentals are not in bad shape at all. We have seen huge rallies across the region so it's natural to see a bit of retracement," Citigroup economist Michael Hart said.

"The liquidity looking for homes is drowning out fundamental issues and secondly, it's drowning out the differentiation between the countries," he said. "I think for the CEE-4, the story of nominal FX appreciation remains in place."

The Czech crown fell 0.4 percent to 27.72 per euro while the Slovak crown was flat at 34.77 , having retraced from record highs after verbal intervention by the central bank and as rate rise expectations faded.

The zloty slipped 0.2 percent to 3.79 per euro while the forint stayed flat near nine-month peaks .

Traders said thin dealings were exaggerating the moves.

"The currency pairs look a bit heavy and we are seeing a bit of bounce in euro/CEE-4 but the currencies are still in demand. I expect this bounce to be shortlived," a trader in London said. "Rather than politics thin liquidity is having an impact."

Polish markets waited to see who could now be appointed to head the central bank. A decision is expected by Christmas.

Hart said it was important not to leave the markets in the dark for much longer, citing the late spring events in Turkey when uncertainty over central bank leadership was seen as creating policy confusion and contributing to a market selloff.

However, data on Thursday reinforced the picture of benign inflation, a boost to bonds and potentially for the zloty. Yields have fallen more than 40 basis points on the five-year sector and the local rates still look attractive, analysts say.

"We think that an appreciation of the zloty is more likely than a depreciation in the short run. The high risk appetite of investors is still the most important argument. We recommend to buy long-term maturities without currency hedge," Raiffeisen bank analysts said in a note to clients.

The dollar crosses were checked as the greenback clung to gains fuelled by recent firm economic data. The South African rand fell 0.75 percent to 7 per dollar , volatile before next week's inflation data and some unwinding in gold positions.

The lira firmed very slightly but managed to touch a fresh seven-month high of 1.4195 per dollar .

A weak yen, the currency usually used for funding carry trades, is seen supporting emerging markets. But moves may be limited before U.S. inflation data that could shed more light on the possible direction of U.S. interest rates next year.

[LONDON/Reuters/Finance.cz]