The demise of the 11 European currencies and the launch of the euro single currency could spur interest in emerging market currencies as players could hunt for alternative trading opportunities in the future. However, the switch will make no fundamental difference to emerging economies, and last year's emerging market meltdown crushed most investor' appetite for risk.
Some analysts, however, see selected opportunities in central Europe, and the frontrunners for EU membership could feel the benefit during the year. The Polish and Hungarian financial markets experienced quite active trading during the first days of the 1999. Poland has ushered in the biggest change, dropping the old five-currency basket and adopting a new basket of 55% Euro and 45% dollar. Hungary has directly swapped Euros for marks in its basket, and the Czech and Slovak crowns have also switched their focus to the Euro.
The Slovak foreign exchange market was quiet during the first days of the year. The crown moved to stronger levels and corrected its sharp weakening against the German mark during the last days of 1998. The crown was quoted against the Euro from the first days and the exchange rate moved from the 43.220/270 level to a 42.760/810 close on January 5.
On the money market, there was an extraordinary Treasury bill auction on December 29. The ministry accepted 3.045 billion crowns worth of bids out of total demand of 3.585 billion for bills with 28-day maturity. The average yield reached 19.58%, sharply higher from the previous December 16 average yield of 16.611%.
The ministry was reacting to the persisting unpaid revenues of the state budget, where the main items that fell short of expectation were VAT, corporate and consumption taxes. The ministry also issued a schedule of 1Q99 auctions: there will be 6 auctions of one year and 5 auctions of two year state bonds. In the first auction scheduled for January 5, the ministry refused to accept any bids from the commercial banks.
The crown is expected to strengthen during the first weeks of the year as we will see some foreign currency inflows. On the money market, rates are stabilising between 17-18%. Future developments will depend on how closely the government sticks to its promise to slash domestic demand by cutting the budget deficit.