BUDAPEST: The Czech crown quickly recouped all its early losses on Monday as strong industrial output and retail data reinforced expectations for further central bank (CNB) interest rate hikes.
Last Thursday the CNB delivered its second 25-basis-point hike since August, but its forward-looking comments were less hawkish than expected and knocked the crown off four-year highs against the euro.
The currency shed a quarter of a percent on Monday before reversing direction after the data.
Industrial output rose by 4.4 percent in annual terms in September and retail sales by 6.2 percent. Both figures exceeded analysts' forecasts.
The crown traded at 25.63 against the euro at 0956 GMT, flat from Friday, while most Central European currencies were little changed.
"The development in industry suggests that the Czech economy remains in an excellent shape, at the same time, it is already in the phase of overheating, at least regarding the job market," said Jiri Pour, analyst at UniCredit.
"We expect a future cooling of the industrial production, or the whole economy, on the side of the key automotive segment, because demand in Europe will probably gradually approach the point of saturation. However, we don't see any reason for pessimism so far," he added.
The bid yield on Czech two-year government bonds, boosted in the past weeks by rate hike expectations, rose to its highest level since April 2014, to 0.395 percent on Monday.
But the CNB's cautious guidance could arrest near-term upside yield pressure, Raiffeisen analyst Gunter Deuber said in a note.
Elsewhere in the region, the Romanian and Polish central banks are expected to keep their main rates on hold at their respective meetings on Tuesday and Wednesday. [nL8N1N94U3
Poland's October data showed a retreat in inflation, but most analysts expect rising price pressures to trigger rate hikes next year, first in Romania and then in Poland.
Polish government bond yields dropped by a few basis points, tracking euro zone debt yields, with the 10-year paper trading at 3.43 percent.
The corresponding yield in Hungary, where the central bank (NBH) is still easing monetary conditions, traded at 2.38 percent, down two basis points.
Hungary's yield curve continued to flatten ahead of the NBH's weekly FX swap tender. Yields are near record lows.
"The classical carry trade is going on," one Budapest-based trader said. "You get money (forint) at zero implied interest rate from the central bank, and buy something, like 3-year papers which provide you with steady half percent yield."
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