Final Word from Tuesday, July 10, 2007

The Czech financial pages are starting to pay attention to the carry trade, the borrowing of money in low-interest currencies for investing in higher-yielding areas. The crown/euro interest-rate differential is attracting speculators, keeping the crown relatively weak. Carry-trade critics say it all washes out in the end, because investors will have to pay a higher rate when they buy back their crowns. But this ignores the macro picture, and two major factors are playing to the advantage of the speculators. First, the CR has potential problems with consumer borrowing and real estate. Second, east Europe is getting very bad press. The FT, Economist and World Bank have all sounded the alarm in the past week. The CR hasn't been the focus of the warnings, but it could be found guilty by association if the dominoes start falling. Which would be very good news for those betting against the crown.[Czech Republic European Union eurozone Financial Times currency trading]


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