Czech crown retreats from record high, IPO weighs

...surge of almost 1 percent in the previous session, dealers said.

The crown traded at 27.725 per euro by 1120 GMT, weakening from the opening level of 27.670 and an all-time peak of 27.630 reached in offshore activity on Thursday night.

Prague dealers attributed the crown's drop to transactions stemming from the initial public offering (IPO) of shares worth 136 million euros ($179.6 million) by Czech artificial fabrics maker Pegas Nonwovens [ID:nL15750538].

"There is euro buying (for Czech crowns) from the IPO," said one of the dealers.

Many analysts were puzzled by Thursday's rally in the currency and cautioned that a deteriorating external deficit spoke in favour of a weaker currency, or at least a dampening of its prospects for a further advance next year.

"Further crown firming beoynd the 27.60 boundary would, in the words of the CNB (central bank) Governor, be truly crazy," analysts at Prague bank CSOB said in a market report to clients.

Central Bank Governor Zdenek Tuma told Reuters in Monday's interview the crown's firming in previous weeks had been on the verge of being "totally crazy" [ID:nL11602090].

Thursday's rally extended the currency's year-to-date rise to 5 percent, reflecting a boom in the European Union member country's manufacturing sector which has boosted exports and resulted in a foreign trade surplus.

Dealers said Thursday's jump appeared mainly driven by investors unwinding a popular trade built on borrowing in the low-yield Czech crown to buy into the Slovak crown .

Low borrowing costs, at 2.50 percent one full percentage point below the euro zone benchmarks, have prompted many market players to sell the crown to buy the Slovak counterpart and other higher-yielding regional currencies in the carry trade.

The cross-currency switches and a deepening current account deficit have caused the crown's advance to underperform the rise in other central European currencies since end-October, and in particular lag the 4 percent rally in the Slovak crown , the region's top performer.

----------------- MARKET SNAPSHOT AT 1119 GMT ----------------- Crown/euro last deals at 27.725 (-0.05 pct) Crown/dollar at 21.098 bid (-0.76 pct)

5-year yield due Oct 2010 3.38 pct bid (-1 bps) 10-year yield due Jan 2016 3.65 pct bid (flat)

5-yr CZK/EUR mid yield spread -44 bps (vs -41) 10-yr CZK/EUR mid yield spread -15 bps (vs -13)

Current levels versus prior domestic close at 1500 GMT ---------------------------------------------------------------

[PRAGUE/Reuters/Finance.cz]