RPT-Czech crown hits 3-mth highs, rate hike bets tamed

(Repeats story published late on Tuesday)

By Marek Petrus

PRAGUE, Oct 31 (Reuters) - The Czech crown firmed to three-month highs versus the euro on Tuesday on buying by big London-based investment banks, amid signs that the five-month-old political crisis may end soon.

President Vaclav Klaus called a quick deal to end the stalemate in the lower house, where centre-right parties and leftist parties each control exactly half the 200 seats after an inconclusive June election [ID:nL31756233].

The Czech currency extended its advance into a third consecutive session, rising as high as 28.080 before retreating. It was at 28.170 per euro <0#EURCZK=> by 1545 GMT, up third of a percent on the day and 0.8 percent higher from early Friday.

"Only explanation I can think of is that there is a large corporate deal going through the market," said one London-based emerging markets dealer with a global investment bank.

The firm crown raises the likelihood that the Czech central bank (CNB) will hold interest rates steady for at least another month, having opted to pause in monetary tightening this month after 25 basis points rate hikes in July and September.

The prospect of fewer rate hikes on the horizon boosted the debt market, with benchmark government bond yields <0#CZBMK=> and forward money market rates <CZKFRA> falling across the board.

"I would say the CNB would be looking at the exchange rate's moves... So this currency firming led the market to lower its bets on another rate increase before the year-end," said Dalimil Vyskovsky, debt trader at Komercni Banka.

The low-yield crown traded on a weaker footing for most of October and some analysts said it appeared to be catching up with this month's rally in high-yield, high-risk emerging market currencies such as Hungary's forint which also rose on Tuesday.

The forint and central Europe's other units have benefited from expectations that there will be no more hikes in U.S. Federal Reserve rates to eat into the region's yield premium and the U.S. economy was also headed for a soft landing.

Some dealers said hedge fund investors might have snapped up the currency following its weakening towards support at 28.50 per euro earlier this month, which forced some players to sell euros for crowns this week to avoid losses on their positions.

"There may be some hedge fund orders, and it is also possible that bets are being taken that there could soon be an agreement on calling early elections," said one Prague-based dealer with a major international bank.

Outgoing rightist Prime Minister Topolanek has been pushing for early elections next spring to break the political deadlock, emboldened by his party's strong showing in Senate and municipal elections earlier this month.

Analysts said investors would probably welcome early elections, as opinion polls have raised the chances of Topolanek's Civic Democrats forming a strong, pro-reform goverment after a new vote.

----------------- MARKET SNAPSHOT AT 1444 GMT ----------------- Crown/euro <EURCZK=> last deals at 28.165 (+0.39 pct) Crown/dollar <CZK=> at 21.998 bid (+0.73 pct)

5-year yield due Oct 2010 <CZ5YT=RR> 3.57 pct bid (-13 bps) 10-year yield due Jan 2016 <CZ10YT=RR> 3.82 pct bid (-5 bps)

5-yr CZK/EUR mid yield spread <DE114147=> -15 bps (vs -7) 10-yr CZK/EUR mid yield spread <DE113529=> 7 bps (vs 7)

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

((Editing by Gerrard Raven; Reuters Messaging: rm://marek.petrus.reuters.com@reuters.net; e-mail: prague.newsroom@reuters.com or marek.petrus@reuters.com; Tel: +420 224 190 477))

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Keywords: MARKETS CZECH CROWN CLOSE