By Jan Lopatka (Reuters, 16.4.2002)

BULLISH SENTIMENT ON CZECH CROWN WANING - C.BANKER.

PRAGUE, April 16 (Reuters) - The Vice-Governor of the Czech central bank, expanding its offensive against the soaring crown on Tuesday, said sentiment was beginning to turn and the currency could see a sharp drop when short-term investors run.

"I think that it is beginning to be understood that there has been some overshooting and a bubble, and that it is very strong," Ludek Niedermayer told Reuters in an interview. "I think that now, there is a slow turning of the sentiment."

The central bank has been waging a battle to halt the crown's run, fed by the feeling that getting into the growing central European economy's currency was a safe bet supported by strong investment inflows and approaching EU membership.

The unit has jumped 15 percent jump against the euro over the past year.

Niedermayer said he has seen independent analyses beginning to take the bank's view that the rise is a bubble, amd this would help stabilise the currency.

Goldman Sachs for example issued a report last week forecasting no more quick currency firming. The central bank has repeatedly sold crowns in the market to halt the unit, whose rise has squeezed firms' export margins while aiding import price competitiveness.

But the interventions have not prevented the crown from reaching new highs at 29.895 to the euro on Friday, though it has since cooled off to 30.08/11 on Tuesday afternoon.

The trend will turn at some point, Niedermayer said, and rapid position-closing by numerous short-term players in the market may make the move even faster. "I think it will be this way: The short-term positions are built on (the presumption) the crown must firm, at least a little and continuously.

"If the exchange rate remains stable for a certain time, if no one wants to jump on the train at for example 30.10, it will turn after staying in some balance for a while. And when it turns, it will turn relatively quickly."

SHALLOW MARKET

This may be accelerated by the shallowness of the market, he said, adding that investors lived in a "liquidity illusion".

He said the firming of the crown in the past months was first caused by expected privatisation inflows - which the bank then pledged to take off the market - but later speculative buyers piled in, sparking a further rise which in turn led companies to hedge their future euro revenues.

The bank agrees the crown has a natural tendency to appreciate as the Czech economy gradually catching up with rich neighbours in the west, but says the current pace is way too fast.

The sooner the bubble bursts, the better, because the lower may be the shock, Niedermayer said, adding it was tough to say whether it would actually happen in days or weeks.

Exporters, who have been selling their future euro revenues, may slow the turnaround if they continue hedging, he said.

But what they hedge now will be missing in future flows. If they convert their future euro-denominated revenues into crowns now, the inflow of foreign currency will not be there later in the year which should work against the crown, Niedermayer said.

INTERVENTION WOULD ACHIEVE MORE NOW

Asked if the central bank was ready to support the stabilisation of the crown by active participation in the market, Niedermayer said he believed there was more balance emerging now and the central bank did not need to be there.

The bank had kept a presence in the market after two bouts of interventions earlier this month. The changing environment would help the effectiveness of any further interventions, he said.

"Under these circumstances, we could have more ambitious targets from the point of view of the move of the exchange rate and probably smaller volumes would be sufficient. The situation when the sentiment is changing would lead to a different result. If we do it or not, I do not want to say," he said.

The bank has repeatedly tried to talk the crown down, which has led to increased resilience of the market to such comments.

But Niedermayer said he was not trying to sell empty words. "No one is interested in inane talk. It is necessary to have analysis behind it, and we believe now we have some analysis."

(C) Reuters Limited 2002.