Czech crown hovers at 27.90/euro, ignores politics

...talks on a broad coalition government.

The crown traded at 27.920 per euro by 1001 GMT, slipping some 0.1 percent from both opening and Wednesday's closing levels. It has hugged a relatively narrow range since scaling an all-time peak of 27.820 in offshore trade on Nov. 30.

Prime Minister Mirek Topolanek's rightist Civic Democratic Party ended negotiations with his leftist rivals late on Wednesday, leaving the country without any agreement on a stable government more than six months after a June general election.

The crown has underperformed central European emerging market currencies over the past weeks, weighed by a record one percentage point short-term rate discount versus the euro zone and a deepening current account shortfall.

The crown rallied strongly in September and October but it has ran out of steam and extended its gains by less than half a percent since end-October.

Its firming has lagged a 1.6 percent rise in the zloty , a 2.5 percent gain in the forint and a 4 percent jump in the Slovak crown, the region's star performer.

Low borrowing costs, at 2.50 percent the lowest in the European Union, have prompted many market players to sell the crown to buy the other, higher-yielding regional currencies in the carry trade.

A number of analysts also turned bearish on the crown after Wednesday's data showing the 12-month rolling current account deficit widened to an equivalent of 4.6 percent of gross domestic product, more than double the 2.1 percent at end-2005.

"We keep our long target in EUR/CZK following the poor current account data," said analysts at BNP Paribas in a report.

"In our view, external imbalances will remain wide, increasing risks to the crown performance in early 2007," they said, adding their target for the crown's drop would likely be extended beyond the current 28.30 per euro.

Analysts said the burgeoning external deficit might explain Monday's warning by central bank Governor Zdenek Tuma in a Reuters interview that the crown's rise to record highs to the euro and the dollar was on the verge of being "totally crazy."

----------------- MARKET SNAPSHOT AT 1001 GMT ----------------- Euro/crown last deals at 27.920 (-0.14 pct) Dollar/crown at 21.097 bid (-0.09 pct)

5-year yield due Oct 2010 3.40 pct bid (+4 bps) 10-year yield due Jan 2016 3.66 pct bid (+5 bps)

5-yr CZK/EUR mid yield spread -39 bps (vs -42) 10-yr CZK/EUR mid yield spread -10 bps (vs -13)

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

[PRAGUE/Reuters/Finance.cz]