BUDAPEST/PRAGUE: The crown hit a 3-month high as investors priced in further Czech monetary tightening even though a batch of Central European inflation data showed a further easing on Friday.
Minutes of the Czech central bank's (CNB) December meeting, where it kept interest rates on hold after four consecutive hikes, were less hawkish than some had expected.
But market participants said the text confirmed a link between crown weakness and further CNB interest rate tightening if needed to fight inflation.
The crown touched its strongest levels since late September at 25.58 versus the euro, before retreating to 25.623 by 1000 GMT, still up 0.2 percent on the day.
That is still significantly weaker than the CNB's average forecast of 25.1 for the first quarter, therefore "there would be space for raising rates," one Prague-based FX dealer said.
Czech inflation, which ran at an annual rate of 2 percent in November, will "accelerate markedly" early this year, said Komercni Banka analyst Viktor Zeisel in a note.
"We stick to our expectation that rates will go higher at the (CNB board's) February meeting," he added.
Price index figures released elsewhere in the region on Friday showed that inflation pressure continued to ease late last year.
Poland's annual inflation dipped further below the central bank's 1.5-3.5 percent target in December, to 1.1 percent as expected.
Hungary and Romania's producer price indices fell in November.
Government bond yields have plunged across the region in the past weeks, flattening curves, due to the decline in inflation, while increased worries over global economic growth, particularly in the United States and China, pushed interest rate forecasts lower.
In the United States, the futures market has started to price in a cut as the Federal Reserve's next interest rate move rather than further hikes.
Government bond yields in developed markets, however, rose on Friday, correcting an earlier sharp decline and triggering a similar movement in Central European long-term bond yields.
Poland's 10-year bonds traded at a yield of 2.126 basis points, rising one basis point but outperforming German Bunds, where yields were 3 basis points higher.
"The bond markets (in Central Europe) have started to behave as safe havens," one Budapest-based fixed income trader said, adding that if global economic growth worries persisted, Central European bond yields could continue to fall.
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