April 7, 2017 / 10:12 AM / 4 months ago

CEE MARKETS-Crown extends gains after cap removed, less volatile than expected

3 Min Read

* Crown firms on second day after its cap got removed

* Crown volatility smaller than expected, may rise again

* Crown firming unlikely to trigger cen. bank action for now

* Czech bond yields rise (Adds dealer comment on crown, consolidation of Croatian markets after weeks of a plunge)

By Sandor Peto and Robert Muller

BUDAPEST/PRAGUE, April 7 (Reuters) - The Czech crown extended gains on Friday in the second session since the removal of a central bank (CNB) cap that had kept the currency weaker than 27 against the euro since late 2013.

The move itself and a rise in volatility was not a surprise.

The CNB's commitment to maintain the cap ended last Friday since higher inflation no longer necessitated a weak crown, and the bank probably did not want to buy more euros to defend the cap after tripling its reserves since 2013.

The surprise was that the crown's swings remained moderate.

It has seesawed between 27.252 and 26.556 against the euro, even though some analysts expected bigger moves beyond 26 and 28.

After an early weakening, the crown firmed 0.4 percent to 26.561 by 0922 GMT in low turnover, while the zloty firmed 0.3 percent.

One dealer said 26 could be a "magic level" as that would already be high enough gain for big crown holders to step in.

Analysts said the crown could remain volatile as many investors want to take profits on the currency, but hope for further gains keeps buyers in play.

"Whereas we would project volatile movements and no linear appreciation trend throughout Q2 and Q3, the overall trend until year-end should bring appreciation of CZK toward 26 against the euro," Raiffeisen analyst Wolfgang Ernst said in a note.

The CNB has pledged to smooth volatility.

Its reserves have swollen to 122.62 billion euros, keeping abundant gunpowder to prevent a crown fall, and it could also lift its record low interest rates if needed.

The CNB's tool to fight an excessive firming could be resuming crown selling. Market participants have said volatility may rise, but the bank is unlikely to step in unless the crown leaves the 25-28 or even 25-29 range.

"We assume that the CNB will not react to exchange rate appreciation to EUR-CZK 25," Societe Generale analysts said in a note. "However, the CNB would probably react should EUR-CZK hit 28, as currency depreciation may jeopardise achieving the inflation target."

Czech government bond yields continued to rise, trading at their highest levels for months or even years.

Elsewhere, the kuna steadied at 7.45 per euro, off two-month lows, and Zagreb's stock index rebounded from 7-month lows after Croatia's parliament passed an emergency law on Thursday to protect the economy from big company failures.

The financial woes of big food and retail group Agrokor have sent Croatian assets into a decline in the past weeks. (Additional reporting by Radu Marinas in Bucharest; Editing by Tom Heneghan)

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