January 9, 2017 / 10:34 AM / 7 months ago

CEE MARKETS-Czech crown surges in forwards, 2-year bond yield at record low

* Crown strongest in 6-month forwards since Sept 2015
    * Tuesday's inflation data could underpin crown cap exit
    * Czech 2-yr bond yield at record low, well below Bunds
    * Forint, zloty retreat from 2-month highs vs euro

    By Sandor Peto and Jason Hovet
    BUDAPEST/PRAGUE, Jan 9 (Reuters) - The Czech crown extended
its gains in six-month forward contracts on Monday, lifted by
hopes that inflation data will support expectations for a
removal of the central bank's (CNB) ceiling on the crown in
mid-2017.
    On the spot market, the crown was glued to the
cap, which keeps it weaker than 27 against the euro, while
Hungary's forint and the Polish zloty were
off Friday's 2-month highs.
    The crown exchange rate implied in 6-month forwards
 jumped to 26.759, its strongest since Sept. 2015.
    The jury is still out on investors' trading strategies for
2017 in Central Europe as they weigh its healthy outlook for
economic growth against rising U.S. interest rates and risks
from European politics, including Britain's EU exit.
    Data released on Friday for Czech industrial output showed a
robust rise in November and underpinned expectations that the
CNB would be able to keep its pledge to abandon the crown cap in
the middle of this year.
    The cap was launched in late 2013 to help the economy by
keeping the crown weak and fight deflation risks, which existed
at that time.
    The bank said on Friday in the minutes of its last meeting
that economic growth was robust.
    December inflation figures due on Tuesday are expected to
show a pick-up in annual price growth to 1.9 percent, within a
whisker of the CNB's 2 percent target, up from November's 1.5
percent.     
    The bank's crown selling to keep it weak slowed somewhat in
December according to Friday's figures, after more than doubling
its fx reserves since 2013, but the new year may
have brought renewed pressure on the cap, analysts said.
    "We expect the CNB to continue to guide markets towards an
exit of the floor by mid-2017 to avoid any speculative pressures
on the floor, but we expect an earlier removal of the floor if
speculative pressures increase substantially," analysts at
Goldman Sachs said in a note. 
    The bank will shrug off a rise in petrol prices that will
lift headline inflation, but if core inflation also rises, it
may exit the cap in May instead of waiting until August, Nomura
analyst Peter Attard Montalto said in a note.
    Speculation about the crown's exit from the cap and a
subsequent rise in the currency have also fuelled demand for
Czech government bonds despite their ultra-low yields.
    Government yield curves continued to steepen in the region
on Monday. The yield on the two-year Czech paper 
dropped 6 basis points to a record low of -1.166 percent, 44
basis points below the corresponding German Bund, a record-wide
spread.         
    
              CEE        SNAPS   AT  1107          
              MARKETS    HOT    CET           
                         CURRENCIES                
                         Lates  Previ  Daily  Chang
                         t      ous           e
                         bid    close  chang  in
                                       e      2017
 Czech crown             27.02  27.02   +0.0  -0.05
                            10     35     1%      %
 Hungary                 308.0  307.2  -0.26  0.24%
 forint                    800    900      %  
 Polish                  4.378  4.356  -0.51  0.59%
 zloty                       2      1      %  
 Romanian                4.504  4.505   +0.0  0.68%
 leu                         5      5     2%  
 Croatian                7.575  7.579   +0.0  -0.26
 kuna                        0      5     6%      %
 Serbian                 123.5  123.7   +0.1  -0.15
 dinar                     400    500     7%      %
 Note: daily  calculate  previ  close  1800        
 change       d from     ous    at     CET    
                         STOCK                     
                         S                    
                         Lates  Previ  Daily  Chang
                         t      ous           e
                                close  chang  in
                                       e      2017
 Prague                  937.6  937.5   +0.0   +1.7
                             6      2     1%     4%
 Budapest                32811  32855  -0.13   +2.5
                           .65    .87      %     3%
 Warsaw                  2002.  1998.   +0.1   +2.7
                            21     76     7%     9%
 Bucharest               7239.  7219.   +0.2   +2.1
                            86     27     9%     9%
 Ljubljana               731.9  728.9   +0.4   +2.0
                             7      1     2%     0%
 Zagreb                  2035.  2030.   +0.2   +2.0
                            12     28     4%     2%
 Belgrade     <.BELEX15  717.7  714.8   +0.4   +0.0
              >              4      8     0%     5%
 Sofia                   595.5  592.0   +0.6   +1.5
                             3      0     0%     5%
                         BONDS                     
                         Yield  Yield  Sprea  Daily
                                       d      
                         (bid)  chang  vs     chang
                                e      Bund   e in
 Czech                                        sprea
 Republic                                     d
   2-year     <CZ2YT=RR  -1.16  -0.06  -044b  -6bps
              >              6      1     ps  
   5-year     <CZ5YT=RR  -0.25  -0.01   +022   +0bp
              >              4      2    bps      s
   10-year    <CZ10YT=R  0.506  0.016   +021   +3bp
              R>                         bps      s
 Poland                                            
   2-year     <PL2YT=RR  2.109  0.009   +284   +1bp
              >                          bps      s
   5-year     <PL5YT=RR   3.01  0.044   +349   +5bp
              >                          bps      s
   10-year    <PL10YT=R  3.723  0.047   +343   +6bp
              R>                         bps      s
              FORWARD    RATE   AGREEMENT          
                         3x6    6x9    9x12   3M
                                              inter
                                              bank
 Czech Rep            <    0.2   0.16   0.14      0
              PRIBOR=>                        
 Hungary              <   0.41   0.47   0.56   0.34
              BUBOR=>                         
 Poland               <   1.79   1.85  1.915   1.73
              WIBOR=>                         
 Note: FRA    are for                              
 quotes       ask                             
              prices                          
 **************************************************
 ************
 
 (Reporting by Sandor Peto; Editing by Gareth Jones)

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