Crown Concerns: Referendum jitters hurting crown

During the first week of October, the crown stabilised to 43.900 crowns to the euro. One of the most important stabilisation factors was NBS governor Marián Jusko's declaration of preparadness to intervene on behalf of the crown should the volatility of the exchange rate increase without relation to fundamental economic indicators. After this, the crown slightly strengthened to 43.800 crowns/euro due to purchases of crowns mainly by domestic banks.
The exchange rate with the euro remained on this level until the Friday of that week. However, the exchange rate with the dollar began to weaken as the cross euro/dollar exchange rate stabilised and the crown reached 50.300 crowns/dollar. This was preceded by an intervention of the G7 central banks in favour of the common European currency, when the crown/dollar exchange rate dropped to 49.000.
The second week of October saw a significant rise in liquid assets, with the crown trading within a range of 43.730-43.950 crowns to the euro, the ceiling price delimited by foreign banks' orders to purchase crowns and the bottom price by clients' orders to purchase a significant amount of euros for the Slovak currency. Analysts hold that the coming November 11 referendum on early parliamentary elections has kept the crown significantly undervalued and the market is expecting a significant strengthening of the crown to 42.000 crowns/euro if polls suggest it will be unsuccessful.

During the first week of October, the crown stabilised to 43.900 crowns to the euro. One of the most important stabilisation factors was NBS governor Marián Jusko's declaration of preparadness to intervene on behalf of the crown should the volatility of the exchange rate increase without relation to fundamental economic indicators. After this, the crown slightly strengthened to 43.800 crowns/euro due to purchases of crowns mainly by domestic banks.

The exchange rate with the euro remained on this level until the Friday of that week. However, the exchange rate with the dollar began to weaken as the cross euro/dollar exchange rate stabilised and the crown reached 50.300 crowns/dollar. This was preceded by an intervention of the G7 central banks in favour of the common European currency, when the crown/dollar exchange rate dropped to 49.000.

The second week of October saw a significant rise in liquid assets, with the crown trading within a range of 43.730-43.950 crowns to the euro, the ceiling price delimited by foreign banks' orders to purchase crowns and the bottom price by clients' orders to purchase a significant amount of euros for the Slovak currency. Analysts hold that the coming November 11 referendum on early parliamentary elections has kept the crown significantly undervalued and the market is expecting a significant strengthening of the crown to 42.000 crowns/euro if polls suggest it will be unsuccessful.

The third week in October brought a testing of lower crown levels with a rate of 43.550 crowns/euro reached, at which foreign banks closed their long-term crown positions. The crown correction stopped at 43.750 crowns/euro and did not move until the end of the week. Again, dealers were troubled by the crown/dollar exchange rate. After a historical minimum of the euro to the dollar (83.25 cents for 1 euro) the crown recorded a historical minimum against the dollar as well (52.450 crowns/dollar).

Perhaps the only moment that put a smile on financiers' faces was when opposition politicians blamed the government for the poor exchange rate. In other words, opposition politicians blamed the slowing of growth in the euro-zone and the dynamism of growth in the US economy on the Slovak government.

Towards the end of the month, the crown broke the psychological level of resistance to the euro reaching 43.500 crowns/euro, and a wave of stop-loss orders pushed the crown all the way to 43.300 crowns/euro. However, orders by domestic clients pushed it down again to 43.550 crowns/euro.

It can be expected that further crown rate developments will depend on the results of the referendum on early parliamentary elections.

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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