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MONEY, FOREX MARKETS

Crown remains volatile while bond yields keep falling

The Slovak crown experienced a period of relatively high volatility over the two weeks ending July 10. The currency appreciated sharply against its mark/dollar basket in the week ending July 3, driven up mostly by the firming Czech crown and expectations of a large conversion from hard currencies to crowns by one corporate client.
After opening on June 29 at around 3.0% on the depreciation side of the fluctuation band, the crown gradually strengthened on the heels of the Czech currency firming and banks' building short positions in hard currencies in an expectation of hard currency inflow to its strongest level of minus 2.10% against the parity on July 8. Foreign investors' activity remained very low and their exposure to the Slovak crown was still insignificant.

The Slovak crown experienced a period of relatively high volatility over the two weeks ending July 10. The currency appreciated sharply against its mark/dollar basket in the week ending July 3, driven up mostly by the firming Czech crown and expectations of a large conversion from hard currencies to crowns by one corporate client.

After opening on June 29 at around 3.0% on the depreciation side of the fluctuation band, the crown gradually strengthened on the heels of the Czech currency firming and banks' building short positions in hard currencies in an expectation of hard currency inflow to its strongest level of minus 2.10% against the parity on July 8. Foreign investors' activity remained very low and their exposure to the Slovak crown was still insignificant.

The crown reversed its week-long upward trend and fell sharply against the basket on July 9, since the expected inflow of foreign funds was less than the market anticipated. It appears that the mentioned corporate subject opted to keep some of the obtained funds in hard currencies, which has recently been made legal by the new foreign exchange law.

As a result, banks had to buy hard currencies to cover their short positions, which weakened the crown. The crown weakened on July 9 to minus 3.0% only to rebound to minus 2.50% on July 10.

But some market players believe the crown should continue to weaken in the coming days as the market now appears to expect an outflow of hard currencies through paying off corporate loans.

The money market, as opposed to the forex market, remained relatively calm although some banks were caught short of funds at the end of the last minimum reserve requirement (PMR) period ending June 30. The National Bank of Slovakia (NBS) has repeatedly sterilized the money supply through repo tenders in the week ending July 10.

However, banks appeared to be more cautious about their minimum reserve positions since the beginning of the current two-week PMR period and their bids in repo tenders were lower than the liquidity surplus would suggest.

The Finance Ministry auctioned two-year state bonds on June 30. The average yield fell sharply to 19.693% compared to 27.186% recorded at the last auction of similar bonds on April 28. The ministry continued to accept only yields below 20% at the following July 7 auction of one-year state bonds, selling a 1.05 billion Sk tranche at an average yield of 19.772%.

The market expects that yields of state securities should not rise above 20% in the next few weeks as the ministry seems to have enough funds in its coffers from the two recent tranches of international bond issues. The shortest maturities on the local interbank market are expected to remain flat, hovering at around 10% in the near future. The long end of the yield curve was slightly declining in the past few days and traders expect that one-month and three-month money could edge further down because of the continuing liquidity surplus on the money market. Six-month rates, now standing a touch below 17%, however, are not likely to fall below 16%.

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