* Zloty/crown trade reversal helps free Czech gains
* Stocks lower, limiting FX gains in region
* Polish bonds firmer after strong Wed auction
(Adds bonds, Hungary cbank poll, Czech T-bill)
By Jason Hovet
PRAGUE, Feb 18 (Reuters) - The Czech crown rose to a
two-month high on Thursday as investors ditched short positions
that had favoured the Polish zloty, while other currencies also
mostly held firmer.
The zloty/crown regional cross trade has been a favourite
among investors in the region, with investors using the Czech
unit's lower rates for funding purposes.
But the zloty had firmed as much as 2 percent year-to-date
against the crown this month and comments by the Czech central
bank's deputy governor on Thursday underlined that its interest
rates will not fall any further. []
"A lot of people are turning around their investment
portfolio," a Prague-based dealer said.
"Everybody had been buying zloty because of upcoming
privatisations, and (zloty/crown) was a strategy No. 1 for
investment houses in London. I think the Polish/Czech story is
partially done," the dealer said.
Polish rates look set to stay on hold for several months to
come. Investors expect Hungarian and Romanian central banks to
ease interest rates further this year, which are among the
highest in the European Union.
The crown <EURCZK=> rose 0.6 percent on the day to bid at
25.65 to the euro, jumping on stop losses after breaking 25.80,
the next technical level that dealers had been targetting.
The zloty <EURPLN=> erased earlier gains to bid 0.4 percent
down, and the Hungarian forint <EURHUF=> was up 0.2 percent. The
Romanian leu <EURRON=> fell 0.2 percent to 4.13 to the euro.
Stock markets in central Europe fell by around half a
percent.
PAUSE FOR NOW
Some analysts said the firming of the zloty, which is now
trading near a 2010 high, had knocked value off the zloty/crown
cross trade. But others say the crown now had room to catch up
with the zloty, and the cross trade could again be a factor.
"We see current CZK outperformance, although admittedly very
impressive, as temporary and we have serious doubts that it will
prove sustainable," Piotr Matys, an analyst at 4Cast, said.
"Thus it is worth keeping an eye on PLN/CZK. We still prefer
the PLN on the back of fundamentals and retracement below 6.40
could present an opportunity to buy it against the CZK."
Volatility has hit central Europe's markets this month while
investors watched for a more detailed EU response to euro zone
member Greece's rising budget deficits.
The euro, which dropped on Thursday, is central Europe's
main reference currency, and units in the region usually track
moves in the euro/dollar.
But that correlation has been broken several times this
month because investors took positions in central European
countries, favouring their better growth prospects and fiscal
positions to those in the euro zone periphery.
Demand at a Polish 10-year bond auction on Wednesday was
triple the offer, highlighting investor confidence in the
country's economy -- the only in the EU to avoid recession last
year. []
Polish bonds were stronger on Thursday before industrial
data due at 1300 GMT.
In the Czech Republic, a 13-week treasury bill auction sold
all its offer on Thursday, with demand more than double supply.
--------------------------MARKET SNAPSHOT--------------------
Currency Latest Previous Local Local
close currency currency
change change
today in 2010
Czech crown <EURCZK=> 25.651 25.815 +0.64% +2.6%
Polish zloty <EURPLN=> 3.999 3.985 -0.35% +2.63%
Hungarian forint <EURHUF=> 271.23 271.65 +0.15% -0.32%
Croatian kuna <EURHRK=> 7.29 7.292 +0.03% +0.26%
Romanian leu <EURRON=> 4.13 4.123 -0.17% +2.6%
Serbian dinar <EURRSD=> 98.7 98.36 -0.34% -2.86%
Yield Spreads
Czech treasury bonds <0#CZBMK=>
3-yr T-bond CZ3YT=RR +8 basis points to 104bps over bmk*
7-yr T-bond CZ7YT=RR -2 basis points to +137bps over bmk*
10-yr T-bond CZ10YT=RR -7 basis points to +114bps over bmk*
Polish treasury bonds <0#PLBMK=>
2-yr T-bond PL2YT=RR +1 basis points to +389bps over bmk*
5-yr T-bond PL5YT=RR -3 basis points to +323bps over bmk*
10-yr T-bond PL10YT=RR -3 basis points to +286bps over bmk*
*Benchmark is German bond equivalent.
All data taken from Reuters at 1233 CET.
Currency percent change calculated from the daily domestic
close at 1700 GMT.
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(Reporting by Reuters bureaus, writing by Jason Hovet; editing
by Patrick Graham, Susan Fenton)
