Central European currencies have had a strong run against the euro so far this year, but with the single currency racing up against the US dollar and year-end approaching, investors might be tempted to lock in those gains. The dilemma is that the region still offers attractive yields and, in some cases, a much improved fundamental story so they will be reluctant to exit their positions too early.
Analysts say the Polish zloty is perhaps the most vulnerable to profit taking, having risen around eight percent against the euro so far in 2004 on the country's improving growth rates, smaller current account deficit and high interest rates.
The process may already be under way with the zloty down around 1.8 percent from last week's 17-month highs versus the euro after an aggressive sell off on Monday.
"There is going to be the temptation (to take profits) with end of the year coming up. A lot of people have made good money in these currencies," said Giancarlo Perasso, head of emerging markets research at WestLB.
"I don't think we'll see this for three or four weeks yet though, people generally start closing their books around the end of November."
Koon Chow, emerging markets currency analyst at CSFB, took a similar line. "The next couple of weeks will probably be okay but after that we could see some technical effects," he said, referring to year-end profit taking.
"Some investors are taking the attitude that the bigger trends in the central European currencies may be behind us."
The Hungarian forint is also seen as vulnerable, having posted gains of around 5-1/2 percent against the euro in the year to date.
A stronger euro erodes the attractiveness of long forint positions, especially with investors also mindful of increasing calls from within the Hungarian government for a weaker currency.
Prime Minister Ferenc Gyurcsany and Finance Minister Tibor Draskovics have both said in the past month that a softer forint would be helpful for the broader economy.
Some analysts suggested those calls might have a bigger impact if they came at a time when investors were in the mood to book profits.
"The Hungarian government is going for competitiveness, they are going for a low forint, therefore profit-taking in the forint is even more important," said Elizabeth Gruie, an emerging markets analyst at BNP Paribas.
The main obstacle to a weaker forint remains Hungary's high interest rates. Last week the central bank cut its key rates by 50 basis points to 10.50 percent, but they remain the highest in the European Union. Some analysts think rates are still too high for people to sell. "The carry is still extremely attractive in Hungary, no one wants to go against such high interest rates," said Perasso.
The forint has been trading between 245.50 and 249 to the euro since early September, with short-term capital inflows to cash in on Hungary's attractive returns counter-balancing concerns over the country's expanding budget deficit and turbulent politics.
Analysts agree there is less interest in profit taking on the Slovak crown, up 2.8 percent against the euro for the year, and the Czech crown, up two percent.
"Demand for these currencies has been linked to expectations of an inflow of funds from the European Union and this will be the same case next year," Paribas's Gruie said.
Perasso of WestLB said although the profits on zloty and forint were attractive, other factors would have to come into play to force a major flight from the central European currencies.
"It will take a big event to convince people to unwind positions to such an extent that these currencies fall sharply."
The trading community was also reluctant to call time on the zloty's strong run: "Fair enough there might be some profit taking, but where do you put your money?" said one UK bank dealer.