MONEY, FOREX MARKETS

Market calm restored in wake of Russian scare, but crown still falls on nervous currency selling by corporates

Quiet fell on the Slovak foreign exchange market during the week starting on August 31, after weeks of turbulence and high volatility fuelled by the Russian financial crisis. But the crown currency started to weaken at the end of the week, with the index effortlessly breaking the support level of 5.0% on the depreciation side of the mark/dollar currency basket.
The main impetus driving the currency down was purchases of hard currencies by local corporate clients. Foreign investor activity on the Slovak foreign exchange market remained insignificant, and traded volumes are not exceptionally big. The crown traded at around minus 4.50% against the basket midpoint for the first three days. Trading was more active at the end of the week, as client orders set the crown on a weakening trend.

Quiet fell on the Slovak foreign exchange market during the week starting on August 31, after weeks of turbulence and high volatility fuelled by the Russian financial crisis. But the crown currency started to weaken at the end of the week, with the index effortlessly breaking the support level of 5.0% on the depreciation side of the mark/dollar currency basket.

The main impetus driving the currency down was purchases of hard currencies by local corporate clients. Foreign investor activity on the Slovak foreign exchange market remained insignificant, and traded volumes are not exceptionally big. The crown traded at around minus 4.50% against the basket midpoint for the first three days. Trading was more active at the end of the week, as client orders set the crown on a weakening trend.

The central bank surprised commercial banks on September 3 when it followed the market movements and set the crown's daily fixing at the prevailing market level, which was then minus 4.70% against the parity. The national bank had fixed the crown at minus 4.50% at the beginning of the week.

The crown continued to weaken after the weak central bank fixing, but the market expected that the central bank would not let the crown slip beyond minus 5.0%. But the central bank, which appears to be frequently checking traded volumes, followed the market again on September 4, this time fixing the crown at 4.95% below the basket midpoint.

The market immediately reacted to the central bank fixing and the crown fell to as low as 5.30% below the parity. The currency recovered some its losses before close of trading on Friday September 4, ending the week at minus 5.10%.

The activity of local banks, which were executing client orders, continued to weaken the crown on Monday, September 7. It traded at minus 5.35% in morning trading, but the central bank again appeared unfazed and fixed the currency at prevailing market levels. The crown subsequently dropped to its year low level of minus 5.6% after the market did not find support at the central bank fixing.

On Tuesday September 8, however, the national bank moved to slow the crown's decline by setting the fixing at minus 5.35% while the currency traded at minus 5.65% on the market at the time of calculation of the index. The central bank appears ready to use the full extent of the crown's fluctuation band, though it may not like to see any radical movements of the currency. That is why the national bank will probably not intervene to support the crown as long as traded volumes remain low and foreign activity insignificant.

The market sentiment is that the crown is likely to be tempted to weaken further as corporate clients continue to buy hard currencies in the fear that a new government emerging from September's general elections will devalue the currency, which would make repayments of their foreign loans more expensive.

The interbank money market also experienced a quieter period in the last week as the Russian financial crisis subsides on European emerging markets. The banking sector ended the August minimum reserve requirement period (PMR) in a liquidity surplus which continued over the first week of the September reserve period.

However, the liquidity surplus has so far pushed down only short-term interbank interest rates, while the back end of the interest rate curve remained well above 20%. Uncertainty on the money market about longer-term development was reflected in an auction of one-year state bonds on August 31, when the average yield rose to 19.411% from 16.922 percent in the previous auction of similar paper on August 11.

The central bank's attempts to drain larger amounts of excess liquidity through 28-day reverse repo tenders failed at the end of the week, after commercial banks demanded higher yields than the national bank was willing to accept. The central bank will probably continue trying to drain the surplus crown liquidity, but the market does not expect a radical decline in maturities longer than one month due to uncertainty about the forthcoming elections.

The front end of the interest rate curve will remain highly volatile and influenced by daily market liquidity. Rates with maturity of up to one month are likely to move between 10 to 15% over the next few days, while longer-term funds will find it difficult to ease below 20%.

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