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MONEY MARKETS

Crown stable, rates sky-high

The Slovak crown continued to weaken against its mark-dollar basket over the week from September 23 to September 30. The crown has been under constant downward pressure from domestic corporate clients, and it hit an all time low level of minus -6.70% against the basket parity on September 25.
The currency hovered between minus 6.20% and minus 6.70% through the week, but the central bank continued to support the crown by fixing it above market levels. The national bank kept its fixing unmoved at 5.95% below the basket midpoint. The market estimates that the central bank has so far used more than $500 million in the past three weeks to support the crown through fixings.

The Slovak crown continued to weaken against its mark-dollar basket over the week from September 23 to September 30. The crown has been under constant downward pressure from domestic corporate clients, and it hit an all time low level of minus -6.70% against the basket parity on September 25.

The currency hovered between minus 6.20% and minus 6.70% through the week, but the central bank continued to support the crown by fixing it above market levels. The national bank kept its fixing unmoved at 5.95% below the basket midpoint. The market estimates that the central bank has so far used more than $500 million in the past three weeks to support the crown through fixings.

There is continuing demand from domestic corporate clients to buy hard currencies which indicates that the crown has the potential for further weakening. Some of the clients appeared to have been borrowing longer-term maturities from the money market, desipte their high level of above 40% at present, in expectation of depreciation of the crown.

Clients and the market expect that the central bank will be forced to widen the crown's fluctuation band because of the growing pressure on the currency. The central bank has already used another tool to defend the crown - it has been keeping the money market short of crown liquidity, which had pushed interbank interest rates to record highs.

The most traded deposits remained to be short-term funds with maturity of up to one month. The entire interest rate curve has been moving between 40 and 60%, with banks quoting wide spreads in an illiquid market.

The Finance Ministry continues to accept high yields in auctions of state securities, which is a strong factor that is likely to prevent interbank rates from declining in the next few weeks. The finance ministry sold a 3.7 billion crown tranche of two-year state bonds on September 29, with an average yield of 29.508%. The maximum accepted yield stayed at its historic high level of 29.950%.

Pressure on the crown, uncertainty over the creation of a new government and the deteriorating position of the finance ministry in rolling over its maturing securities will probably keep money market rates high in the near future. The shortest maturities will remain volatile, with the front end of the interest rate curve staying over 20%. The longer end of the cure will remain between 40 to 60% because of the shortage of longer term funds on the market and expectations of a depreciation of the Slovak crown.

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