BUDAPEST/PRAGUE: The crown touched a two-week low against the euro on Wednesday, amid concern the Czech central bank will strike a more dovish note at its meeting on Thursday after inflation decline in February.
"The sword of Damocles hangs above the crown," Komercni Banka analysts said in a note.
Central European currencies and stocks mostly fell, tracking global risk-taking trends, as risks of a trade war between the United States and China grew.
Warsaw led the decline in equities prices, with its blue-chip index shedding 1.8 percent by 0808 GMT and hitting a one-year low.
In currencies, the crown traded at 25.475, a shade weaker from Tuesday and off a two-week low of 25.487. It has been underperforming its regional peers recently after a retreat in inflation across the region, except for Romania, where surging wages continue to boost prices.
The Czech and Romanian central banks have started to raise interest rates to fight inflation, and some investors are worried that Czech markets have priced in too much rate hike expectation.
A stronger crown can be only reached via further rate increases, Raiffeisen analyst Stephan Imre said in a note. However, he said, rate hike speculations may return in the coming months and that could strengthen the crown.
"We base our constructive view for CZGBs (Czech government bonds), especially longer-dated ones, on this still intact CZK (crown) appreciation story," he added.
Romania's central bank is expected to deliver its next rate hike next week, but that does not help government bonds because its tightening is not expected to boost the leu.
Romanian bond yields mostly continued to rise on Wednesday, bucking a regional trend of a modest drop.
Polish yields dropped 1 to 2 basis points, with 10-year debt trading at 3.2 percent, after a strong auction on Tuesday. Low supply is now expected in April, Bank Zachodni WBK analysts said in a note.
They said Polish assets could benefit if the European Commission lifts a rule of law procedure against Poland after the government pledged to make changes in a judiciary reform.
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