The National Bank of Slovakia intervened on the Slovak foreign exchange market for the first time since the Slovak crown was floated in October last year. The NBS stepped in after the EURSKK exchange rate jumped by 2% early on March 9. The crown easily broke through the psychological barrier of 44.000 against the euro, plummeting to a year-low of 44,800/900.
A fall in interbank interest rates in the past few days was seen as the main reason for the crown depreciation, but increasing local corporate demand for hard currencies was also behind the developments. The central bank sold only a very small amount of euros in the two rounds of interventions that took place. In the first round, the NBS sold only 10 million euros in very thin market trading in the morning, nudging the market down to 44,300/400. In the second round, after the EURSKK reached new lows of 45,000 in the afternoon, the NBS probably did not sell anything, as the market corrected itself and moved lower after the NBS was spotted on the monitors.
The market closed at 44,600/650 and the next day at 44,450/550 after volatile trading in the range of 44,200-800. Central bank officials downplayed speculations that the NBS had intervened because the crown had neared the bottom of the central bank's target range, saying there was no such thing as a target range for the crown.
The NBS' statement was interpreted by the market as meaning that the central bank would not oppose the crown's depreciation, but that it does not want this to happen in sharp moves. Next day, bank officials confirmed this opinion, saying that the NBS saw no need to intervene on the FX market because the market was calm. The EURSKK exchange rate was at that moment close to the levels at which they had intervened the day before.
Many traders said that Tuesday's interventions were part of a dangerous game being played by the NBS. The central bank has been boosting crown liquidity on the money market in the past few weeks to pull interest rates down and make budget deficit refinancing cheaper. In view of this strategy, the Finance Ministry refused the whole demand in the last few auctions of state bond and bills.
On Tuesday, the same day when the NBS intervened on the spot market, the ministry organised a two-year auction of state T-bonds. Demand in the auction was not affected by development on the spot market because commercial banks had submitted their bids earlier in the day.
However, any kind of attack on the crown could push the central bank to sterilise the money market, meaning that the ministry could have serious problems finding any money on the local market. Thus, the ministry sold a 4.14-billion-crown tranche at an average yield of 18.067%. On the next day, the ministry said it would not accept yields higher than 17% in the next 1-year T-bond auction organised for March 16, and at the same time set the maximum accepted amount at 5 billion crowns. It is hard to predict if there will be good demand at this yield, but the market welcomed this strategy as a good way of reaching lower yields.
Further Slovak market moves will depend on macroeconomic developments, mainly with the state budget situation and the current-account deficit. The crown should stabilise between 44.200-45.000 in the short run, but another weakening cannot be ruled out, as another wave of local demand for EUR and USD is expected on the market. Interest rates should stay at low levels as long as we do not see any serious attacks on the FX market.
Author: Roman Petransky
