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Rising interest rates give strong support to crown

The Slovak crown has shown only light fluctuations since the beginning of February. The EUR/SKK exchange rate, mainly monitored by the central bank, has moved in a narrow range between 42.450 and 42.780.
The market has also been watching developments on the Czech market, where the Czech crown weakened by 10% during the last few weeks. However, the rising interest rates on Slovak money market supported the Slovak currency very well, forcing the CZK/SKK exchange rate lower and lower to a trough of 1.1150 on February 10.
The first weeks of February also brought the first direct FX deal between a commercial bank and the central bank since the floating of the crown.

The Slovak crown has shown only light fluctuations since the beginning of February. The EUR/SKK exchange rate, mainly monitored by the central bank, has moved in a narrow range between 42.450 and 42.780.

The market has also been watching developments on the Czech market, where the Czech crown weakened by 10% during the last few weeks. However, the rising interest rates on Slovak money market supported the Slovak currency very well, forcing the CZK/SKK exchange rate lower and lower to a trough of 1.1150 on February 10.

The first weeks of February also brought the first direct FX deal between a commercial bank and the central bank since the floating of the crown. The central bank showed the EUR/SKK bid and bought a bigger portion of foreign currency sold by the customer to the local bank in order to avoid market fluctuation. However, some analysts see this as the central bank's intervening to weaken the crown as their foreign exchange reserves fell to $2.84 billion on February 3.

Finance Minister Brigita Schmögnerová said on February 9 that she would prefer to see the crown stable at current levels than to boost exports through a weaker currency. She sees 10% as the maximum acceptable decrease of the crown from its current level.

Schmögnerová said this one day after the Slovak Statistical office announced that Slovak consumer prices had risen by 3.0% month-on-month in January for a year-on-year increase of 6.8%.

On the money market, interest rates moved slightly higher with all periods quoted above 18%. In the one year T-bond auction, the ministry accepted a maximum yield of 18.9%. The average yield was 18.501%, higher than the 18.045% in the last auction.

No bids were accepted in the 182 day T-bill auction of February 10. The average yield in the last refinancing repo-tender moved higher too and reached 17.52% in the tender organised same day. However, the banking sector during the period exceeded the cumulative volume of funds necessary to meet minimum reserve requirements. The higher interest rates thus confirmed the market's uncertainty as to how the Finance Ministry will deal with the nation's high foreign indebtedness and budget problems.

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