MONEY MARKETS

Liquidity shortage paralyses money market

Crown stays in small band
The Slovak crown saw another week of relatively low volatility and low liquidity as domestic companies remain the only strong factor on the market that is able to influence the crown's movements.
Corporate clients continued to buy small amounts of hard currencies, apparently to hedge their foreign loans as they fear that the crown might be devalued after the elections. However, the central bank stuck to its strategy of fixing the crown at stonger than market levels, which offset corporate selling and kept the currency within a range of between 5.0 and 6.0% on the weak side of the basket parity.

Crown stays in small band

The Slovak crown saw another week of relatively low volatility and low liquidity as domestic companies remain the only strong factor on the market that is able to influence the crown's movements.

Corporate clients continued to buy small amounts of hard currencies, apparently to hedge their foreign loans as they fear that the crown might be devalued after the elections. However, the central bank stuck to its strategy of fixing the crown at stonger than market levels, which offset corporate selling and kept the currency within a range of between 5.0 and 6.0% on the weak side of the basket parity.

The crown firmed to around minus 5.0% on September 17, after a liquidity shortage on the money market forced some local banks to sell hard currencies to obtain funds for client payments in crowns. But a rating downgrade by Standard and Poor's caused another wave of hard currency buying by local subjects, which pushed the crown to around minus 5.3% on September 18.

Since foreign investors remain inactive on the Slovak market and local banks are generally reluctant to hold any large positions in a sensitive time shortly before elections, the crown will probably stay within a range of minus 5.0 and minus 6.0% in the next few days. Market attentionis now focused on whether the new government formed after the weekend elections will move to devalue the Slovak crown.

Interest rates soar

The interbank money market continued its turbulent developments over the last week as a liquidity shortage kept rates at their high levels. The central bank started to add market liquidity through refinancing repo tenders on September 18, but the liquidity inflow failed to bring the banking sector to a square position in minimum reserve requirements.

Rising rates and a nervous atmosphere paralysed trading on the interbank market on September 17, and the central bank was unable, for the first time in 12 months, to set the daily Bratislava Interbank Offered Rate (BRIBOR).

Shorter deposit rates, with maturity of up to one month, jumped to as high as 60% on September 17 only to retreat to between 30 and 40% the next day after the central bank's three-day refinancing repo tender. The back end of the interest rate curve stayed between 25 and 30%.

State bond yields hit all-time high

The Ministry of Finance continues to drain money market funds at high interest rates in state bond auctions, which indicates that the ministry will need to borrow more heavily in the near future to roll over maturing state securities and to cover state budget expenditures.

The average yield in one-year state bond auction rose to 27.903% on September 22 from 25.183% in a previous auction a week ago. The maximum accepted yield of 29.95% was the highest yield the ministry ever accepted in an auction of state securities.

Around 4.5 billion crowns worth of state securities will mature by the end of September and the need to refinance them is likely to keep interest rates high.

Since the market will probably remain in liquidity shortage in the next few days, it is very unlikely that deposits with maturity of up to one month could decrease under 30%. Longer-term rates are rarely traded at present. The back end of the rate curve is therefore expected to remain little changed and is forecast to move somewhere between 25 and 30%.

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