PRAGUE. JULY 12. INTERFAX C.NTRAL EUROPE - The Czech crown has weakened significantly since the beginning of 2007 and with the Czech National Bank (CNB) likely to raise the key interest rate by 25 basis points (bp) soon for a second time this year, is becoming less attractive as an alternative funding currency, Danske Bank cautioned in a flash note Thursday.
"We have long argued that the Czech crown is a good alternative funding currency to the traditional funding currencies such as the [Japanese] yen and Swiss franc," Danske Bank senior analyst Lars Christensen said. "However, the crown [is] now probably weaker than the Czech central bank is comfortable with [and] a bit more caution is probably warranted with respect to using it as a funding currency."
The CNB last increased the Czech Republic's official interest rates by 25 bp after its May sitting to 2.75% and is widely expected to up them again by another quarter point after its July 27 meeting.
The Czech crown jumped to EUR/CZK 28.31 Wednesday as investors were ending carry trades and buying low-interest currencies in order to finance their better-yield investments.
"[From] a technical perspective, it looks like the uptrend in EUR/CZK has been broken - at least temporarily. The key level to watch is EUR/CZK 28.268," Christensen said, adding "our technical analysts expect this key level to be tested in the coming days."
Danske Bank continues to view the crown as a good alternative funding currency to the Japanese yen and Swiss franc and "we does not expect any massive strengthening," he added.
"However, at present levels it might be prudent for investors to trim their EUR/CZK positions, as EUR/CZK could move down further - at least in the short term," Christensen said. "Furthermore, it might be a good idea to start looking at other CEE currencies as supplementary funding currencies."
The Czech crown's so-called sister currency, the Slovak crown (SKK), "is the most obvious candidate in our view, even though Slovak rates are slightly above ECB rates, at present by 25 bp," he added.