The Slovak money and foreign exchange market experienced very a interesting development over the last two weeks. The Russian financial turmoil prompted foreign investors to sell Eastern Europe currencies. This trend finally made an impact even on the Slovak currency.
Offshore interest in Slovak financial markets rose, while the crown slid through the 3% level on the weaker side of its +-7 percent basket band on the 10th of August. The largest move was recorded on the 11th, when the crown lost more than 1% within a day. Even the key barrier of 4% was broken effortlessly, as the National Bank(NBS) did not intervene in its daily fixing.
During the next few days, the Slovak crown fluctuated in range of 3.8 - 5.2% on the weak side of the band, driven mainly by Czech market developments. With the index closer to the 7% band mark, the market started to become less liquid. On the 19th, the money market jumped 4-5 % for 1-6 month tenors. This move was caused mainly by foreign banks, which started heavy borrowing on crown deposits and then selling the crown against hard currencies in order to hedge their exposure to crown-denominated securities.
This "pre-election closing" was widely expected, but caused big concern among local banks. The money market remained overliquid, and regional problems could still put the crown under big pressure. Then, on August 20, the crown index reached a new high of 5.5%, and the forex market started to become illiquid with wide spreads and low amounts. But the crown recovered from early losses against its mark/dollar basket after the central bank fixed the currency stronger than prevailing market levels. The central bank fixed the crown at minus 4.5%, compared to minus 5.2% on the market shortly before the fixing.
So far, the market has been watching positions close, so the NBS slowed down the process in order to avoid any panic on the market. The market is not expecting that foreign or local banks will create big speculative positions against Slovak crown, and even with a liquidity surplus the central bank could handle a foreign currency outflow from the country.
On the capital market, an auction of one-year state bonds occured onAugust 11th, where the Ministry of Finance sold only 2.23 billion Slovak crowns ($63.7 million) out of a total demand of 8.94 billion crowns at an average yield of 16.922%. These yields were down roughly 1% compared to the last similar auction. However, this auction was expected to be the last successful one during the pre-election period, as local banks will show no interest in long term state securities in an environment of rising rates on the money market and with the local currency under pressure.
On August 21st, short term deposits rose close to 30%, and tenors of longer than 1- month became illiquid with no offers on the market. With the nature of the post-election government unclear and central bank steps uncertain, the market is expecting more Slovak crown selling and more foreign investors willing to hedge their exposure in Slovakia. This could hold the crown at weak levels, but it should remain within the currency band as the central bank is expected to support the crown through everyday fixings. Interest rates are expected to hover at higher levels over the next 1-2 months.
