Spectator on facebook

Spectator on facebook

FOREX MARKETS

Slovak crown trends mirror Czech

Only 3 weeks after the long awaited floating of the Slovak crown against its basket, the currency is strengthening mightily against the lows it posted only 2 days after the float, trading around 9.0% down from the old parity versus 6.3% prior to the float. At the same time, interest rates (and forwards) are coming down rapidly due to sizeable departures from "pre-float" positions and the central bank's determined adding of liquidity via repo tenders.
This relatively subdued reaction comes against a background of external economic fundamentals which are in a far worse state than was the case in the Czech Republic at the time of the Czech crown float in May 1997.

Only 3 weeks after the long awaited floating of the Slovak crown against its basket, the currency is strengthening mightily against the lows it posted only 2 days after the float, trading around 9.0% down from the old parity versus 6.3% prior to the float. At the same time, interest rates (and forwards) are coming down rapidly due to sizeable departures from "pre-float" positions and the central bank's determined adding of liquidity via repo tenders.

This relatively subdued reaction comes against a background of external economic fundamentals which are in a far worse state than was the case in the Czech Republic at the time of the Czech crown float in May 1997. Indeed, Slovakia has experienced rapid growth in both short and long term external debt and unsustainable deficits in the fiscal and current account balances, coupled with almost non-existent FDI. From a liquidity point of view, it is worth noting that access to short selling of the Slovak crown has been more limited than it was for the Czech crown in May 1997.

Interestingly, the price action for DEM/SKK and DEM/CZK is almost identical: in both cases, an initial top was established after only 2 days of trading, accompanied by a 50% correction. In the case of the Czech crown, renewed currency weakness was not seen again until interest rates had stabilised at lower levels in July 1997, at which time the DEM/CZK retested the old highs. But this limited DEM/CZK weakening in July happened against the background of a significantly stronger USD/DEM.

Also, on the short term interest rate front, the price action has so far been similar. Based on the Czech experience, the Slovak crown interest rates should stabilise soon , albeit at a higher level than prior to the float. So far, the price action of DEM/SKK after the float on October 2 has to a very large extent mirrored DEM/CZK developments prior to and after May 27, 1997. That this has happened despite the different global circumstances is quite significant, and could give a guide to future Slovak interest rate and currency movements.

Should this relationship remain intact, it is expected that the DEM/SKK will strengthen towards 21.25 (21.85-22.00) over the coming days, accompanied by a drop in interest rates towards the 18% offer for 1 month tenures. At this point, we can see short SKK positions being established for a move towards 24.00 or higher.

While the above analysis does not take in to account the nominal or real level of the SKK/CZK cross rate, it is likely that the correlation between the 2 currencies will increase significantly in the future as the "unnatural" barrier of 2 different currency regimes has disappeared. It is thus likely that any further expected weakening of the Slovak crown could be an initiator of a similar move with the Czech crown, but might well happen independently as the unwinding forces of the Slovak crown float come into play.

Top stories

Man who abducted the president’s son speaks out

The testimony of the former secret service agent could be of importance in a court process against the ex-spy boss.

Former SIS director Ivan Lexa

Press freedom is bleeding across our borders

Critical media are always the first targets of populists and press freedom enemies.

Foreigners: Top 10 events in Bratislava Video

Tips for the top 10 events in the capital between January 19 and January 28, plus regular services in different languages, training, temporary exhibitions and highlights of the year.

Scandi 4

Crematorium in Bratislava is an architectural revelation Photo

Those who have experienced farewells in other crematoria know what makes it special. Now the best work by the architect Ferdinand Milučký is getting a monograph

Crematorium in Bratislava by architect Ferdinand Milučký