The Slovak crown continued its remarkably strong and stable performance over the past two weeks, appreciating gradually to 1% on the weaker side of the plus/minus 7% fluctuation band. In the week ending May 8, the crown tested that level several times, breaking through for the first time in 1998 on May 7 when it closed at 0.8% below the currency basket parity.
The gradual strenghtening was fuelled mainly by local corporate demand, resulting from the drawing of new foreign currency loans and partially from the increase in foreign interest and participation in auctions of state bonds and T-bills, which offer high yields.
Interest rates for securities with tenures shorter than 1 month recorded a significant measure of volatility again, stemming from the banking sector's shaky liquidity which had been caused by the fulfilment of the minimum reserve requirement (PMR) set by the National Bank of Slovakia (NBS). 1-day money rates were the most volatile, with interests between 1-19%. The longer was tenure, the narrower the volatility range.
After May 7, short-term interest rates eased as the banking system remained rich on funds throughout the week. The fall concerned securities with tenures up to 1 month, while longer papers eased only slightly or didn't move at all, since most longer-term liquidity is being drained through government bond auctions.
At the May 5 auction, the Finance Ministry accepted an all-time high yield of 29.5% for one-year state bonds, satisfying bids worth 2.22 billion Sk out of total demand of 3.19 billion Sk. Average yield was 28.133%. At the following auction on May 12, the ministry wrestled the maximum accepted yield down to 28.99%, satisfying bids worth only 2.46 billion Sk out of total demand of 6.97 billion Sk. That development may indicate that the ministry will continue to try to lower yields in subsequent auctions.
At the end of the week ending May 8, Slovakia launched its 3-5 year Eurobond, totaling $900 million and made up of dollar, mark and yen tranches. According to the Finance Ministry, the bulk of the bond's proceeds would be used to restructure the state debt, "to change from short to medium and long term debt".
On the money market, the short end of the yield curve is expected to move higher, but will most probably stay under 16%. Long-term deposit prices will depend on the results of the forthcoming auctions of state bonds and T-bills. On the foreign exchange market, the NBS's daily fixings over the past two weeks have followed market movements.
The crown is expected to weaken from its strong levels in the following weeks, but increased foreign interest in future auctions of state bonds and T-bills could provide very strong support for the currency.
The ministry will try to auction 5-week T-bills on May 20, although we may see nothing sold again as the market will probably try to charge a premium on top of the cash market, and the ministry will elect to focus on the May 19 bond auction.
