After a period of relatively calm development, the Slovak foreign exchange market experienced another run of high fluctuations. The USD-SKK exchange rate moved above 40.000 SKK/1 USD, and the EUR-SKK rate broke the long-term barrier of 43.000 and moved quickly higher by 8 figures in two days.
According to the central bank, the sudden weakening was caused by the statements of the rating agencies Moody's and S&P, as well as the prolonged cabinet discussion on the state budget. However, the agencies only affirmed their current ratings for Slovakia, and dealers did not see any local or foreign flows based on that event. Slovak foreign exchange and money markets are not generally sensitive to rumours, and dealers generally trade the overall market position.
On February 18, the EUR-SKK exchange rate moved above 43.000 as the appetite of mainly domestic clients for hard currencies put the crown under pressure. However, this territory was stoutly protected by local market makers, who created big short euro positions in their portfolios and waited for any local or foreign interest to buy Slovak crowns. But such interest did not appear, and these banks had to cover their exposed positions. Thus we saw a "short-squeeze" on February 19, when the EUR-SKK closed near to 43.800. The falling EUR against USD pushed the USD-SKK exchange rate above 40.000 for the first time in the history of the Slovak crown.
Falling interest rates on the Slovak money market also lent the crown weak support. The central bank added a big chunk of liquidity into the banking sector. As of February 21, the banking sector was 4.88% in excess of the cumulative volume of funds required to meet minimum reserve requirements.
More than 18 billion crowns of maturing state debt has to be rolled over next month, so the central bank started to keep the market permanently overliquid in order to help the Finance Ministry reach lower yields and higher demand in the coming auctions of state T-bonds and T-bills. A high surplus of funds in the sector pushed the short-end of the yield curve sharply lower, with one-day funds close to 1.5% on February 24.
This also affected all tenors of up to three months, with one-month quoted at 15.2/15.9, two percent lower compared to the levels of one week ago. In these conditions, the demand in the two-year T-bond auction organised on February 23 reached 4.21 billion crowns (4.11 accepted). Average yield was 18.936 and maximum 19.480%.
In the short run, we will see the Slovak crown become weaker again, as the local banking sector position remained short of EUR. The yield curve should remain positive but any central bank refinancing or sterilising could change that. Thus we will see volatile developments on the market again.
Author: Roman Petransky
