NBS refinancing rumours cool interest rates

The Slovak crown weakened around 2% from November 11 to 13, hitting 11.8% below parity on Friday November 13. The crown's fall was fuelled mainly by foreign banks' demand for hard currencies, creating short positions in Slovak crowns.
On the other hand, fundamentals remained weak and the entire yield curve has been in decline. Thus, some fresh demand for long-term Slovak crown funds appeared on the money market, and we saw an increase at the long-end of the yield curve after a period of sharp decline.

The Slovak crown weakened around 2% from November 11 to 13, hitting 11.8% below parity on Friday November 13. The crown's fall was fuelled mainly by foreign banks' demand for hard currencies, creating short positions in Slovak crowns.

On the other hand, fundamentals remained weak and the entire yield curve has been in decline. Thus, some fresh demand for long-term Slovak crown funds appeared on the money market, and we saw an increase at the long-end of the yield curve after a period of sharp decline.

The central bank kept adding liquidity through 14-day repo tenders. They organised 4 repo-tenders with average yields between 8.99-10.30% from November 12 to 19. But the main issue was the first auction of 91-day T-bill this year, organised on November 18. Total demand reached 8.052 billion Sk, but only 2.096 billion was accepted with bids between 16.25 and 19.49% and an average yield of 18.9%.

High demand and low yields make it likely that a further decline will be seen on the money market in the near future. We will see at least another 4 auctions of similar papers this year, and the yields could come closer to levels where the central bank is refinancing the market. On the other hand there is clear floor as the downside is capped by Slovakia's overall economic situation, and as some progress in the restructuring of domestic banks is inevitable.

On November 18, the crown was stable at 10.6% below parity. The decline in bid/offer spreads that has taken place on the FX market is a good sign, so lower volatility is expected during next weeks. On the money market, interest rates hovered at 14.0/15.0 bid/offer for 1 month, 18.0/18.5 for 3 months and 19.5/20.5 for 6 month deposits.

We will see some gradual decline at the long-end of the yield curve during the next few weeks. The central bank's intention to organise one-month refinancing repo-tenders, rumoured on the market, could push interest rates even lower.

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