Experts predict slight crown weakening
The Slovak crown held mostly stable against its mark/dollar currency basket in the past two-week period, starting on July 27. Activity was very light with only sporadic trading . The crown opened at around 2.2% on the depreciation side of its plus/minus 7.0% fluctuation band around the basket parity within which it is allowed to move. The currency traded in a narrow range of between minus 2.1% and minus 2.4% against the basket midpoint. The crown has become much less sensitive to developments with the Czech crown, to which it had been naturally pegged in the last few months. The main factor that is now able to drive the Slovak crown in either direction is corporate client orders, as foreign investor activity still remains very low. The crown is very likely to move between minus 2.0 and minus 3.0% against the midpoint in coming weeks. Some market participants, however, expect a gradual shifting towards the weaker end of the predicted range, or even beyond it, saying that some foreign investors may be tempted to withdraw their funds from the Slovak market before the September parliamentary elections. This move should not be very radical as foreign exposure remains low and, on the other hand, the central bank seems to have enough power to prevent the crown from suffering from short-selling.
Central bank flattens yield curve
The interbank money market experienced a period of lively trading and several surprising moments in the past two weeks with a general upward trend in most maturities. The central bank has stepped up its efforts to influence money market rate movements by staging several verbal and open market interventions. On July 27, the central bank said it would not want further falls in maturities of up to one month, while adding that it could foresee a further decline in longer-term rates. This was a clear signal that the national bank (NBS) wanted to see a gradual flattening of the yield curve. Short-term maturities, of up to one month, have been steadily declining over the past three months after the finance ministry successfully issued several tranches of international bonds. This has led to a money market surplus as the ministry was able to cut its dependence on deficit covering from the domestic market.
First ever 28 day reverse repos
The one-month rate, which the NBS follows as a reference market rate, fell below 10% on July 27 for the first time in more than two years. The NBS moved further in propping up the short-term end on July 29 when it announced a one-month (28 day) reverse repo tender (to drain liquidity), the first such operation ever. The average rate in the tender was 9.89%. The NBS held a second one-month reverse repo on August 7, with the average yield rising to 10.37%. The market expects that, with the exception of the shortest maturities (ie. up to two weeks), which should remain more volatile, the interest rate curve could move between around 11% for one-month deposits and 16% for six-month funds in the near future. Another surprising move by the central bank was an auction of three-month liquidity bills on August 5, the first such auction since October 1996. The NBS accepted bids worth 3.7 billion crowns out of an overall nominal demand of 5.7 billion. The average yield was 15.49%, while three-month deposits traded at around 13% shortly before the auction. The results of the auction surprised the market and pushed rates slightly higher.
Yields in state securities, which are another important factor for interbank interest rates, continued to decline in the last two auctions, with the one-year average yield breaking a psychological support of 18% on August 4. The finance ministry accepted bids totalling 2.2 billion crowns out of the overall demand of 11.31 billion crowns. The average yield was 17.999. Some market participants expect yields from state bonds to remain flat, or slip slightly further, in the next few auctions, which could drag the long end of the rate curve down. One-year deposits currently hover a touch above 18%.
