The Slovak crown reversed its sharp two-week decline on Monday, August 24, but the currency remained highly sensitive to developments on other emerging markets amid the ongoing Russian financial crisis.
The crown's rebound came on the heels of renewed appetite for the currency after some foreign investors realized that the direct negative impact from Russia on Slovak capital markets should not be strong. The crown was also helped by the central bank statement on Friday, August 21, that the bank was determined to keep the currency within its fluctuation band.
The crown opened at minus 4.70% against the mark/dollar basket on August 24, but easily firmed through what was considered a resistance level of minus 4.0%; it traded between minus 3.0 and minus 4.0% against the basket parity until August 27. Hard currency buying by local banks pushed the crown lower on August 27, when the currency lost around 60 basis points.
The crown will probably stay very volatile in the next few weeks as the market will continue to closely watch attempts to solve the Russian financial crisis. However, the Slovak crown is not likely to fall too close to the weak end of its plus/minus 7.0% fluctuation band as the central bank will probably support the currency again by intervening through its daily fixing if it sees a danger of a sharp depreciation. The crown is seen moving somewhere between minus 3.0% and minus 5.0% against the basket midpoint.
The Russian financial turmoil has taken a much worse toll on the Slovak interbank money market over the past week, as continued borrowing by foreign investors has sent interest rates soaring well above 20%. Short-term maturities remained the most volatile funds, moving within a wide range of between 16 and 28%. One-day deposit rates, still the most traded maturity, retreated by around six percentage points to 16% on August 25, only to shoot up again to 26% on August 26 as negative perceptions of the Russian debt restructuring deal weighed upon European emerging markets.
The long end of the interest rate curve also increased, but these funds were less volatile than short-term maturities, as six-month money edged up only to around 25% from 23% a week ago. The money market is likely to remain in a nervous state and experience hectic trading in the days to come, with a strong potential for sharp rate fluctuation in case of negative news from Russia.
Due to high volatility, it is difficult to predict rate movements. However, in the absence of further deepening of Russian economic crisis, the front end of the interest rate curve should hover between 15 and 20% while the back-end could stabilize somewhere between 22 to 25%.