The Slovak crown appreciation during the first few days of this year was stopped by the high domestic interest in buying hard currencies on January 12. Later, however, emerging market currencies took a serious knock as nerves over Brazil weighted on markets worldwide.
On January 13, worries that Brazil may be sliding into political and financial crisis dragged down emerging market currencies. Eastern European currencies weakened by 2-3% in one day, which also had an impact on Slovak financial markets. The Euro-Slovak crown exchange rate hit bottom on January 11 and early January 12, hitting the level of 42.420/470. Later, the crown gradually weakened and moved to its January 13 high of 42.860/900 EUR-SKK.
Money market interest rates stayed down until January 12, when they found some support from the two-year state bond organised the same day. The bond can be redeemed after just one year, which confused the market a little, as this was the first such issue on the Slovak market. A wide range of bids was accepted, with an average yield of 18.975%. The minimum yield was 17.984 and the maximum reached 19.5%, which was surprisingly high, since if the early redemption option is exercised the minimum yield would be 20.637 and average yield 22.545 (the bond holds a 15 percent coupon). In the other auction of a 28-day treasury bill, the ministry rejected all bids.
The Slovak crown has begun to be much more affected by developments on other emerging markets as the interest of foreign banks in trading in the crown has increased during the last few weeks. Future developments in Brazil could have a strong impact on the crown, but the market at the moment does not expect the crown to move sharply in either direction. The yield curve should remain positive with interest rates between 16.0-17.0% for one-month funds.
Author: Roman Petransky
