MONEY, FOREX MARKETS

Crown holds firm despite international market turmoil

The Slovak crown market remained relatively unaffected by international turmoil during the first days of June. The crown traded mostly within the narrow range of 1.4 - 1.8% on the weak side of its plus/minus 7% exchange rate band, fuelled mainly by local corporate demand for hard currency.
However, from June 9th the Slovak Crown gradually weakened from levels around 1.25-1.4 to 2.5% on the weak side of the band. The weakening came on the heels of a fall in the Czech crown against the mark. The move was also fuelled by higher local corporate demand for hard currencies.
Further declines in longer-term deposit rates and weak demand, except in auctions of state securities, gave no support to the crown. The National Bank (NBS) continued to follow market trends in its fixing policy.

The Slovak crown market remained relatively unaffected by international turmoil during the first days of June. The crown traded mostly within the narrow range of 1.4 - 1.8% on the weak side of its plus/minus 7% exchange rate band, fuelled mainly by local corporate demand for hard currency.

However, from June 9th the Slovak Crown gradually weakened from levels around 1.25-1.4 to 2.5% on the weak side of the band. The weakening came on the heels of a fall in the Czech crown against the mark. The move was also fuelled by higher local corporate demand for hard currencies.

Further declines in longer-term deposit rates and weak demand, except in auctions of state securities, gave no support to the crown. The National Bank (NBS) continued to follow market trends in its fixing policy.

On the money market side, the NBS organised four one-week repo tenders during the last two weeks in order to sterilise the ongoing liquidity surplus. But the shortest tenures still remained volatile, driven by the reserves position within the system.

The average yields on these 7 days repo tenders were around 11-12 percent. We saw a further significant fall on the longer-end of the yield curve. All tenures longer than 1 month fell by more than 150 bps. Six months deposits, the longest traded tenure, fell below 18 percent.

The NBS rejected nearly all bids in the auction of state securities, even though there was significant demand slightly above 20 percent. After two unsuccessful auctions, the MOF accepted only 160 million Sk ($4.7 million) out of 6.55 billion Sk ($191 million) total demand at an average yield of 19.8% at an auction on June 9th.

The maximum yield reached 19.99%, and minimum yield was as low as 17%, but the average suggests that most of the issue was sold at above 19%. Looking at the amount accepted, it seems as if the MOF was trying to send a signal that it would only accept bids below 20 percent. In the last successful auction, on 27th May, the MOF accepted an average yield of 27.05%.

The Slovak Statistical Office released data showing that the January-March current account deficit was $460.6 million, compared with a $485.3 million shortfall in the same period of 1997. These figures are at a similar level, and analysts are treating them as a negative sign because they indicate no major change for the better. The numbers were all the more disappointing because the current account deficit rose sharply after the onset of an apparently favourable trend at the end of last year.

The fundamentals remain broadly unfavourable, so the Crown will come under further pressure until the central bank fixings start to follow the market.

The Slovak Crown will probably weaken further during the next few weeks. However, one can not exclude some correction, and at 2.5 percent on the weak side of the band there will be strong support for the crown.

At levels above 2.5 percent, the fear of the central bank's intervention through everyday fixing will support the crown. Also, developments with the Czech Crown in the run-up to elections will strongly affect the Slovak currency.

There is not much room for further decline in interest rates. The yield curve will remain steep, and longer tenures will be more in demand the closer we come to elections.

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