* Czech president suggests crown cap regime may end soon * Crown strongest vs euro on 3-month forwards since 2013 * Zloty tests 7-month high, Polish stocks near 21-month high By Sandor Peto and Jan Lopatka BUDAPEST/PRAGUE, March 21 (Reuters) - The Czech crown surged against the euro in forward contracts on Tuesday after the country's president suggested the central bank could soon remove its cap on the currency's spot value.
The central bank (CNB) introduced the cap, which keeps the crown below 27 against the euro, in late 2013 to fight deflation risks. Defending the cap, it has tripled its foreign currency reserves, buying tens of billions of euros this year.
Inflation recently reached the bank's 2 percent target.
The bank has a hard commitment to maintain the cap until the end of this month, and has said it would remove it around the middle of the year.
On Monday, President Milos Zeman said: "I spoke to (CNB) governor Rusnok two days ago, and I will tell no secret when I say that the end of the exchange rate commitment is expected in the first half, and it is not excluded that possibly sooner than we know it." The crown traded flat at 27.02 against the euro, but its implied rate was bid at 26.829 in 3-month forwards , its firmest level since the cap was introduced.
"In practice this of course meant that the CNB had to buy even more foreign reserves," CSOB said in a note, adding the CNB may abandon the cap any time from April.
The one-year implied rate, at 26.697, was still weaker than its January peaks at 26.574.
But its rise in forwards shows that speculation over a rise in the crown is increasing again, despite warnings from the central bank that the currency has become heavily overbought.
International sentiment remains positive for Central European assets. Investors are pricing in a slower rise in U.S. interest rates since the Fed's meeting last week.
The zloty had firmed 0.3 percent to 4.2608 against the euro by 1006 GMT, testing 7-month highs it reached in overnight trade.
It is the region's best performing currency this year, up 3.43 percent, and the Warsaw bourse's bluechip index, which rose 0.5 percent, also leads the region. It has risen by almost 18 percent since 2016 and is near 21-month highs.
Alior Bank analyst Tomasz Kolarz said a pick-up in economic growth and the labour market encouraged retail investors to invest in equities funds.
"It seems, however, that (a) positive macroeconomic scenario is already priced in, and for further gains some positive surprises would be needed," he added.
CEE SNAPS AT 1106 MARKETS HOT CET CURRENCIES Lates Previ Daily Chang t ous e bid close chang in e 2017 Czech crown 27.02 27.02 -0.01 -0.06 20 00 % % Hungary 308.6 308.2 -0.11 0.07% forint 000 650 % Polish 4.260 4.274 +0.3 3.36% zloty 8 9 3% Romanian 4.563 4.560 -0.05 -0.61 leu 0 7 % % Croatian 7.405 7.405 +0.0 2.03% kuna 0 8 1% Serbian 123.7 123.9 +0.1 -0.32 dinar 500 300 5% % Note: daily calculate previ close 1800 change d from ous at CET STOCK S Lates Previ Daily Chang t ous e close chang in e 2017 Prague 984.7 979.8 +0.5 +6.8 6 1 1% 5% Budapest 32078 32357 -0.86 +0.2 .70 .88 % 4% Warsaw 2293. 2281. +0.5 +17.
75 45 4% 75% Bucharest 7992. 7967. +0.3 +12.
55 09 2% 81% Ljubljana 800.2 803.8 -0.45 +11.
6 8 % 52% Zagreb 2147. 2154. -0.32 +7.6 48 34 % 5% Belgrade <.BELEX15 746.9 746.0 +0.1 +4.1 > 6 6 2% 2% Sofia 636.0 636.5 -0.08 +8.4 9 9 % 7% BONDS Yield Yield Sprea Daily d (bid) chang vs chang e Bund e in Czech sprea Republic d 2-year