MONEY MARKETS: CROWN CONCERNS

Crown strengthens after referendum

The banking sector entered the first November period with a significant shortage of liquid funds. Interest rates on one day maturities rose to 8.1-8.5%, following large outflows of funds accepted at auctions of T-bills, the payment of quarterly taxes and an increase in the compulsory minimum reserves (CMR) compared to the previous month.
Banks entered the second November period with a slight shortage of liquid funds, which became more visible after a transfer of funds into the state budget on the second day of the period. Thus, one-day maturities were set by banks at 7.7-8.1%, with their price gradually falling to 7-7.4% after new inflows of liquid funds.


Peter Kníž

The banking sector entered the first November period with a significant shortage of liquid funds. Interest rates on one day maturities rose to 8.1-8.5%, following large outflows of funds accepted at auctions of T-bills, the payment of quarterly taxes and an increase in the compulsory minimum reserves (CMR) compared to the previous month.

Banks entered the second November period with a slight shortage of liquid funds, which became more visible after a transfer of funds into the state budget on the second day of the period. Thus, one-day maturities were set by banks at 7.7-8.1%, with their price gradually falling to 7-7.4% after new inflows of liquid funds.

The crown started November with a tendency to strengthen. Before the first week of the month, the crown was pushing 43.350 crowns/euro, however, a consequent wave of euro purchases pushed the crown back down again to 43.410 crowns/euro. Following forecasts of an unsuccessful referendum on early elections, the crown began to strengthen one week before the November 11 polling date with crowns purchased mainly by foreign banks, pushing the currency up to 43.100 crowns/euro.

The second strong impulse the crown received was the unexpected announcement of Moody's ratings agency of a change in the outlook for Slovakia from stable to positive. The market did not wait long to respond, and the psychological barrier of 43.000 crowns to the euro was soon history.

The crown continued to break more barriers, reaching 42.680 crowns/euro. It received another boost when NBS Governor Marián Jusko said the NBS was prepared to intervene on behalf of the crown should the exchange rate rise outpace the performance of other fundamental economic factors. One day before the referendum the crown closed trading at 42.640 crowns/euro.

The reaction of the crown to the referendum failure was immediate, pushing the next opening level up 0.1 to 42.540 crowns/euro. Within another 10 minutes the crown strengthened by the same margin to 42.440 crowns/euro. Foreign banks were consequently joined by domestic non-banking clients, and the crown's corrected position stopped at 42.870 crowns/euro. Slovak exporters' orders to sell foreign currencies stopped this downward movement and pushed the crown back up again to 42.550 crowns/euro.

The crown remained within this range almost through to the end of November.


Peter Kníž is a money markets analyst at Ľudová banka in Bratislava. Questions and comments can be sent to him at Peter_Kniz@luba.sk

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