Czech crown extends rally, cuts rate hike scope

 (Updates prices, adds quote, background, money market) 
    By Marek Petrus 
    PRAGUE, Oct 19 (Reuters) - The Czech crown hit a life-time 
high versus the euro for the second consecutive session on 
Friday, extending a rally which analysts said reduced the scope 
for further interest rate hikes to contain resurgent inflation. 
    The crown has been gaining strength from a robust economy 
expanding at about 6 percent clip for the third year running, 
which together with a surplus trade balance tends to spur fund 
flows from investors seeking a safe haven in periods of risk 
aversion. 
    The crown's upswing mirrored this week's surge across 
central European currency markets, driven by the U.S. dollar's 
slide to record lows and growing hopes of a market-friendly 
outcome to weekend's election in neighbouring Poland. 
    "Given the favourable macro backdrop and a trade balance 
surplus, it is quite logical the crown has room to firm," said 
one Prague-based dealer with an international bank. 
    "The region is still sexy in a way, and if we closed 2006 at 
27.5 per euro, we may be in for ending 2007 at a firmer level, 
say around 27.0," he added. 
    The crown firmed as high as 27.260 against the euro, above 
the previous peak of 27.310 hit on Thursday, as weaker equities 
and persisting credit concerns fuelled risk aversion and stoked 
a bid for safe-haven assets globally. 
    The crown traded at 27.330 per euro <EURCZK=> by 0805 GMT. 
    It has risen nearly 5.5 percent since July, wrongfooting the 
central bank's outlook for stability around 28.2 to the euro and 
dampening inflation pressures stemming from strong demand growth 
more than policymakers had expected. 
     
    RATE HIKE PROSPECTS FADE 
    Fading expectations of a quick rate hike due to the rallying 
currency helped knock forward money market rates <CZKFRA> from 
five-year highs. 
    The 3X6 FRA rate <CZK3X6F=>, showing where investors expect 
three month lending rates to be in three months' time, shed 4 
basis points. 
    The central bank (CNB) raised interest rates to a five-year 
high of 3.25 percent in August. However, policymakers have 
pointed to a diminishing scope for more rate hikes due to the 
strong crown and uncertainty fed by the global credit crunch. 
    A majority of analysts in a Reuters poll [CNB/INT] expect no 
rate change next Thursday when policymakers will review policy 
and discuss the quarterly forecast update taking into account 
the crown's firming. 
    "It will be difficult for officials at the central bank to 
call for raising rates," said David Navratil, analyst at Ceska 
Sporitelna, who sees a next rate rise delayed until the first 
quarter of next year. 
 ((Reporting by Marek Petrus; Editing by Mike Peacock; 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)) 
 
 ---------------------- MARKET SNAPSHOT ------------------------ 
 Crown Currency       Latest   Prev      Pct change   Pct change 
                               close     on day       in 2007 
 vs Euro   <EURCZK=>  27.330   27.366    +0.13         +0.62 
 vs Dollar <CZK=>     19.128   19.146    +0.10         +8.86 
 
 Equities 
 PX Index  <.PX>     1,880.8  1,886.0    -0.28        +18.37 
 
 Domestic Govt Bonds    Latest   Prev    Yld change   Yld change 
                                 close   on day       in 2007 
  5Y Yield <CZ5YT=RR>   4.25     4.23    +2 bps        +96 bps 
 10Y Yield <CZ10YT=RR>  4.51     4.51    +0 bps        +79 bps 
 
 Mid Yield Spreads (in bps)              Spd change   Spd change 
                                         on day       in 2007 
  5Y vs    <EU5YT=RR>    +10       +0      +7          +74 
 10Y vs    <EU10YT=RR>   +21      +18      +3          +45 
 --------------------------------------------------------------- 
 All data taken from Reuters at 0808 GMT. 
 Currency percent change and yield change calculated 
 from prior domestic close at 1500 GMT. 
 
 - For previous updates on Czech currency moves click on [CZK/] 
 - For the new Reuters scrolling global forex service please 
click <FXNEWS> 
 
 --------ECONOMIC DATA RELEASES (double click to access)-------- 
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 --------------------LIVE PRICES & DATA------------------------- 
 Crown Spot Against EUR  <EURCZK=>  Against USD           <CZK=> 
 Czech Bonds            <0#CZBMK=>  C.Europe Bonds    <CEEBONDS> 
 Crown FRAs          <CZKFRA=TTKL>  Central Bank Fixings <CNB02> 
 Contrib. Cross Rates     <CZKX1=>  Czech Central Bank   <CNB01> 
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  Keywords: MARKETS CZECH CROWN