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MONEY, FOREX MARKETS

Financial markets begin to trust NBS resolve to lower market rates

During the past two weeks, the shortest-term interbank rates (overnights and tomnexts) remained floating between 3-15 percent. There was a large liquidity surplus on the money market during the last days of February's minimum reserve requirements period. The surplus was caused mainly by the high volume (3 billion) of the NBS's refinancing funds in the sector. The new period market opened at around 14 percent (O/N), but later rates decreased to 6 percent.
The NBS continued to sustain the liquidity surplus via two-week repo tenders. Later, banks began to realize that the surplus was permanent and believed declarations of NBS officials about lowering interbank interest rates.

During the past two weeks, the shortest-term interbank rates (overnights and tomnexts) remained floating between 3-15 percent. There was a large liquidity surplus on the money market during the last days of February's minimum reserve requirements period. The surplus was caused mainly by the high volume (3 billion) of the NBS's refinancing funds in the sector. The new period market opened at around 14 percent (O/N), but later rates decreased to 6 percent.

The NBS continued to sustain the liquidity surplus via two-week repo tenders. Later, banks began to realize that the surplus was permanent and believed declarations of NBS officials about lowering interbank interest rates.

The Finance Ministry rejected all bids in auctions of short-term and 28-day T-bills. We believe the ministry is waiting until the NBS achieves a reduction in long-term rates, forcing the sector to accept lower yields in state securities auctions. On February 24, the ministry sold a small 530 million crown tranche of one-year state bonds with average yield of 22.46 percent. It was the first successful auction after the ministry rejected all bids in three previous auctions of similar state papers. The following week, the ministry sold one-year bonds worth 1.15 billion crowns with average yield of 23.44 percent.

On the FX market, the crown has been gradually rising against its basket parity, gaining around 2.0 percent in two weeks. The crown, pushed up mainly by the NBS's policy of fixing at stronger-than-market levels, strengthened significantly after some banks converted their long foreign currency positions. On March 3, the crown briefly touched -1.0 percent against the basket parity, making the NBS fix it at market level for the first time in several weeks. It was a clear signal that the central bank is satisfied with the current exchange rate. Before March 6, the crown weakened again to -1.65 percent.

We believe that on the money market, the NBS will continue to use mid-term refinancing repo tenders, pushing interbank rates even lower. The central bank probably realizes the need for a further decrease in long-term maturities, especially when taking into account the anticipated yields at which the budget deficit should be financed this year. Recent developments on the market showed the NBS wants to have the crown strong and stable. The spot market will remain very sensitive, but low liquidity and even lower foreign interest will allow the NBS to fully control the crown's developments.

A large amount of old state debts have to be repaid this year, and the foreign trade deficit could also put the crown under pressure later this year, which means the crown remains a candidate for devaluation.

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