Czech crown regains ground as carry trades unwind

...investors appeared to unwind yield-dependent trades funded from crowns.

The crown gained a third of a percent from the previous domestic close to a one-week high of 28.300 per euro by 1015 GMT. Heightened investor aversion to pouring money into riskier emerging markets sent it to an overnight low of 28.515.

A tumble in global stocks, including the biggest daily fall in Chinese share prices in a decade, soft U.S. data and growing tensions over Iran's nuclear programme have prompted investors to cut their risk exposure in the world's financial markets.

But some analysts said further emerging markets weakness could play into the crown's favour as it could see more market players reversing selling crown positions used to buy high-yield assets with the goal of capturing the interest rate spread.

"Calmer sentiment in early trade has left euro/crown pushing toward 28.30, and downside pressure is expected to persist, as EUR longs are unwound during this phase of risk aversion," said Lucy Bethell, strategist at Royal Bank of Scotland in London.

The low cost of money -- the 2.50 percent official Czech rate is the lowest in the European Union -- had led many investors to sell the crown for higher-yielding assets, pushing it down more than 3 percent from record highs hit in December.

Prague analysts and dealers said the crown might yet resume its slide and test key levels between 28.500 and 28.550 in the short-term, but robust economic and exports growth should help to propel the currency to renewed strength later this year.

"Given the expected return to a firming trend in the second half of this year, we view the current crown weakness as a suitable opportunity for exchange rate hedging," said Vojtech Benda, analyst at ING Wholesale Banking in a note to investors.

----------------- MARKET SNAPSHOT AT 1015 GMT ----------------- Crown/euro last deals at 28.300 (+0.34 pct) Crown/dollar at 21.447 bid (-0.20 pct)

5-year yield due Oct 2010 3.20 pct bid (-4 bps) 10-year yield due Jan 2016 3.66 pct bid (-3 bps)

5-yr CZK/EUR mid yield spread -72 bps (vs -71) 10-yr CZK/EUR mid yield spread -29 bps (vs -27)

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

[PRAGUE/Reuters/Finance.cz]