Czech crown touches multi-year high; short Czech yields rise

BUDAPEST/PRAGUE: The Czech crown touched its highest since 2013 on Monday, seeking a new equilibrium after the country's national bank (CNB) removed its cap on the currency last week.

The crown firmed to 26.50 against the euro before retreating to 26.53 by 1147 GMT, still firmer by 0.1 percent.

The zloty and the forint shed 0.3 percent as geopolitical worries weighed on emerging market assets.

A key concern is that Marine Le Pen, the far-right candidate in France's two-round presidential election on April 23 and May 7, has promised a referendum on euro zone membership.

The worry contributed to a jump in the one-month volatility of regional currencies.

One-month crown and forint options against the dollar jumped to their highest since Britain's vote last year to quit the European Union. Zloty volatility was its highest since November.

The rise in crown volatility was to be expected as investors who had bet on the cap's withdrawal accumulated long crown positions estimated at up to 60 billion euros.

Profit-taking on those positions could put the crown under significant pressure, though the steadily growing Czech economy is expected to lift it by next year.

"I think 26.500 is the first support (level). But it is difficult to say how strong it is," one dealer said. "I would expect, however, that it is still not a strong enough level for those who opened short EUR/CZK (positions)."

The yield on Czech 2-year bonds was bid at positive levels for the first time since mid-2016, up 9 basis points at 0.02 percent, while a wide spread with ask yields at minus 0.48 percent showed uncertainty and traders did not report

any trades above zero.

Short-term yields jumped when the CNB scrapped the cap but are unlikely to rise above zero soon.

Czech data showed a rise in annual inflation to 2.6 percent in March, the highest since 2012.

The bank could start raising interest rates in late 2017 or early 2018 if inflation develops, CNB Governor Jiri Rusnok was quoted as saying in an interview with the Hospodarske Noviny daily.

The bank said in a statement that the inflation figures represented slight upwards risk, but "counteracting this will be a strengthening of the koruna expected by the forecast from mid-2017 onwards".

The leu firmed 0.2 percent to 4.51 against the euro despite a rise in Romania's January-February trade deficit. Romania opened books to tap international markets with 10-year euro-denominated bonds.