BUDAPEST/PRAGUE: The Czech crown extended its losses against the euro on Thursday as investors sitting on a huge pile of long positions struggle to take profits, with risks from Sunday's first round of the French presidential election weighing on sentiment.
Investors are concerned that either or both of the far-right and far-left French candidates, both of whom are Eurosceptic and anti-euro, might make the decisive second round.
The crown is vulnerable after investors bought tens of billions of euros worth of the currency in the past months, speculating on a surge.
The Czech central bank removed its cap, which had kept the crown weaker than 27 against the euro since 2013, two weeks ago, and most of the crown long positions are still in the market, with investors waiting for stronger levels to take profits.
After an initial surge following the cap exit, the crown has retreated. On Thursday it almost touched the former cap level, before rebounding to 26.92 by 1100 GMT, still down by 0.2 percent.
"It is a combination of the huge positioning (in the crown) and external factors," one Prague-based dealer said, adding that a plunge was unlikely for now, but a breach of 27.05 could lead to an even bigger fall.
The country's second Treasury bill auction since the removal of the cap draw robust interest, with demand for the 5 billion crowns worth of 17-week papers reaching 28.4 billion crowns.
The government sold 20.4 billion crowns worth of bills. The average yield rose though, to -0.35 percent from -1.25 percent at an auction two weeks ago.
With cheap crown financing through swaps still available, investors can still earn even when yields on short-term debt remain below zero.
"Anyone who has euros and swaps to crowns and buys T-bills has a nice carry between 1.5 and 2 percent," a dealer said.
Commerzbank analysts said in a note that increased crown volatility, until the crown long positions are reduced, was no surprise.
It is also a risk that inflation is retreating again globally, and if that triggers speculation for a reintroduction of a cap, a crown sell-off could follow, they said, adding though that this scenario was unlikely.
Regional central banks have not showed intentions to move towards less loose policies despite a surge in wages which in theory could lift prices.
Poland reported 5.2 percent annual rise in wages for March on Wednesday and Hungary a 10.7 percent jump on Thursday.
Romania, where the net average wage was up 14.7 percent in February, plans further wage increases.
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