Czech crown treads water as rate gap set to widen

PRAGUE, Dec 7 (Reuters) - The Czech crown hovered around 28 per euro in morning Thursday trade, held in check by investor expectations that its yield disadvantage versus the euro zone was set to reach a record level.

The European Central Bank's widely expected interest rate increase on Thursday would bring the main euro zone rate to 3.50 percent, a full one percentage point above the Czech central bank's 2.50 percent policy rate.

The crown traded at 27.985 per euro <0#EURCZK=> by 0955 GMT, firming a touch on the day and hugging a narrow range around the 28.0 level that it has held since the start of this week.

The currency has shed about 0.6 percent since peaking at an all-time high of 27.820 in offshore trading on Nov. 30.

Third-quarter current account figures [nL07847390] only slightly revised monthly data published in prior months, and investor attention focused instead on third-quarter GDP and November inflation releases, both due out on Friday morning.

The economy is forecast to have grown at a 5.2 percent clip in the third quarter, deepening the slowdown from its cycle peak early this year. Inflation is seen ticking up to 1.5 percent in November from a near 1-1/2-year low of 1.3 percent in October. But low interest rates, and expectations that subdued inflation will delay any interest rate increase into the first half of next year, have raised the crown's appeal as a funding vehicle for investments in other emerging markets currencies.

Calyon investment bank recommended investors sell crowns for the Slovak counterpart at 1.2654 <CZKSKK=>, with a target of 1.2400 and a stop-loss at 1.2790. The crown was quoted at 21-month lows of 1.2665/1.2695 to the Slovak unit on Thursday.

"The out-performance of Slovakia both in terms of real and financial convergence compared to regional peers plays for further gains of the SKK, especially against the CZK," Calyon analysts said in a report to investors.

"The prospects of the latter is held back by low interest rates and some recent downgrading of euro entry expectations."

The Slovak economy grew by a real 9.8 percent, year-on-year, in the third quarter, the statistics office said on Thursday, pitching the Czechs' northern neighbour against the likes of China as one of the fastest growing economy in the world.

- FOR REUTERS POLLS ON CZECH GDP AND CPI FORECASTS, DOUBLE CLICK ON FOLLOWING CODES [ID:nL30712025] and [ID:nL30590160].

----------------- MARKET SNAPSHOT AT 0955 GMT ----------------- Crown/euro <EURCZK=> last deals at 27.990 (+0.04 pct) Crown/dollar <CZK=> at 21.021 bid (-0.04 pct)

5-year yield due Oct 2010 <CZ5YT=RR> 3.34 pct bid 10-year yield due Jan 2016 <CZ10YT=RR> 3.62 pct bid 10-yr CZK/EUR mid yield spread <DE113529=> -6 bps

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

((Reporting by Marek Petrus; Editing by Cheryl Juckes; 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 MORNING