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MONEY, FOREX MARKETS

Slovak crown weakens, further drop predicted

The Slovak crown continued its poor performance during the two-week period ending June 26 as regional problems continued to drive the currency down. The Czech crown's weakness on the back of local speculative moves has dragged its Slovak counterpart lower. On June 11, the Slovak crown broke the 2% margin on the weaker side of the fluctuation band, and it continued to slide towards the 3% level, which was first tested on June 15. This level was widely believed to be a quite good support level for the crown, later proved as the fall halted at 3%. Part of the support stems from some market players fearing that the National Bank of Slovakia (NBS) may intervene anywhere beyond this level. However, the crown tested the 3% level several times during the week ending June 19, on which day we saw it slip to a low of 3.3% on the weaker side of the band.

The Slovak crown continued its poor performance during the two-week period ending June 26 as regional problems continued to drive the currency down. The Czech crown's weakness on the back of local speculative moves has dragged its Slovak counterpart lower. On June 11, the Slovak crown broke the 2% margin on the weaker side of the fluctuation band, and it continued to slide towards the 3% level, which was first tested on June 15. This level was widely believed to be a quite good support level for the crown, later proved as the fall halted at 3%. Part of the support stems from some market players fearing that the National Bank of Slovakia (NBS) may intervene anywhere beyond this level. However, the crown tested the 3% level several times during the week ending June 19, on which day we saw it slip to a low of 3.3% on the weaker side of the band.

Since the Slovak crown is naturally pegged to its Czech counterpart, the nervousness surrounding the Czech general elections delayed the anticipated appreciation of the Slovak crown. However, a strengthened Czech currency finally triggered some Slovak crown demand on June 24, resulting in it breaking back under the 3% level and further appreciation to 2.75% on the weaker side of the band. The NBS did not intervene through its daily fixings and merely followed the market throughout the period. On June 26, the crown firmed to 2.35% but corporate demand for hard currencies moved it back at 2.85%.

Our expectation is that the crown should move toward stronger levels around 2.4% and perhaps even 2% in the near future. However, this may well change in the long run.

The Slovak Statistical Office announced on June 24 that the May foreign trade deficit reached 6.884 billion Sk after a shortfall of 8.828 billion in April, putting the overall deficit for the January-May period at 32.282 billion Sk. This is much more than the central bank expected in its 1998 monetary plan, and it means that local demand for hard currencies is very high, and that we can see the crown at much weaker levels in the distant future.

Money markets have not produced any big surprises during this period, as the banking sector maintained more funds than minimum reserves required by the NBS. The short end of the yield curve therefore remains dependent on the NBS's sterilization efforts. The NBS has repeatedly drained funds through 7-day sterilization repo tenders, at average yields between 9.5-11%. On the other hand, some funds came back through maturing T-bills, so we saw interest on a 6-month money slide toward 17% on the offer side.

At recent auctions of Slovak state bonds, the Finance Ministry confirmed previous signals and didn't accept any bids asking yields of more than 20%. Nevertheless, demand remained very high, squeezing average yields down to 19.877% at the most recent auction. We don't expect any major changes to the current situation. We even see a slight chance for further easing on the longer end of the curve as the Government manages to borrow again on the international markets through the Deutsche mark-denominated Eurobond issue amounting to $250 million with a maturity in 2003 (see story on page 5).

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