The Slovak crown strengthened slightly against its mark/dollar basket during the week from September 9 to September 16, but is still hovering around its 12-month low of between minus 5.50% and 6.0%.
The central bank continued to support the currency with indirect interventions by setting the daily fixing stronger than market levels. However, orders by domestic corporate clients to purchase hard currencies prevented the crown from posting any more significant gains. The crown traded at 5.85% on the depreciation side of the (plus/minus 7.0%) fluctuation band around the basket parity on September 9, while the central bank set the fixing at 5.35% on the weak side of the fluctuation corridor.
Slovak corporations have been buying hard currencies over the past few weeks, and dealers say the companies are trying to hedge their foreign exposure (hard currency loans) before the forthcoming general elections, to be held on September 25 and 26. However, there is no significant outflow of hard currencies as yet although the central bank's foreign currency reserves fell by the relatively large amount of $182 million in the week ending September 9.
Banks are reluctant to keep opened positions during these uncertain times, less than two weeks before the elections, so they often use the central bank fixing to complement their hard currency positions. The crown gradually firmed by around 35 basis points to some 5.50% on the weak side of the basket on September 16, with the central bank keeping the fixing rate unchanged at minus 5.35%.
The market expects that foreign investor activity will remain thin in the days before elections, and that the only factor driving the currency will remain corporate client orders. However, the crown is likely to approach the central bank fixing levels and move closer towards 5.0% on the depreciation side of the band in the next few days.
Interbank deposit rates experienced another period of uncertainty accompanied by a continuing sharp increase in rates of all maturities. Although the banking sector met the minimum reserve requirement at the end of the two-week reserve period on September 15, decreasing liquidity pushed rates up to near 30%.
The central bank held an auction of its 84-day liquidity bills on September 9 when it accepted average yield of 22.99%. Rates rose sharply on September 11 after foreign bank borrowing and after a liquidity outflow through hard currency purchases at the central bank fixing.
The Bratislava Interbank Offer Rate (BRIBOR) for one-day funds rose to 33% on September 16 from 20.50% on the previous trading day, while the six-month BRIBOR was up to 31% from 26.12%.
The rate increase was helped by surprisingly high yields accepted by the finance ministry at its auctions of state bonds. The ministry accepted an average yield of 25.18% in an auction of one-year state bonds on September 14, a sharp increase from 19.41% in the last auction of similar paper on August 31.
The surprisingly high accepted yields (maximum yield at 28.9%) as well as the relatively large accepted volume of 3.4 billion crowns raised suspicions that the ministry has already run out of the money it borrowed on international markets in May (around $1.0 billion). The market expects that the ministry will have to continue in accepting high yields, which will be an obstacle for decrease in longer-term interbank interest rates.
Despite an expected inflow of funds from maturing state securities at the end of the week, the banking sector will probably remain in a liquidity shortage unless the central bank decides to hold refinancing repo tenders to compensate for the outflow of funds in the state bond auction and for hard currency purchases at its fixings.
Maturities of up to one month are very likely to remain highly sensitive to the liquidity situation and will probably show high volatility in the next few days, oscilating somewhere between 15 and 30%. The long end of the interest rate curve will probably move between 25 and 30% in the coming days.
