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MONEY, FOREX MARKETS

3 billion Sk deficit in banking sector expected

The beginning of the May 5 week saw another beginning in the bi-weekly cycle of banks having to meet minimum reserve requirements (PMR) as stipulated by the central bank. The banking sector needed only 36.413 billion Sk to meet the requirement at the start, meaning that a 4.2 billion Sk balance was in excess.
Overnight rates dropped the most as a result of the surplus, but there were also decreases in the one-week and two-week rates. Long-term deposits up to six months, however, remained stable at about 17.90/18.40% p.a..
The slight downward trend in interbank rates continued until May 8, when the Ministry of Finance released a new issue of government treasury bills. In all, mostly banks snapped up bids worth 2.2 billion Sk with an average yield of 14.21% p.a., but that outpaced the 3.4 billion Sk demand. As a result of the ministry's action, overnight, one-week and two-week deposits all showed gains, while longer-term rates (2-6 months) went down.

The beginning of the May 5 week saw another beginning in the bi-weekly cycle of banks having to meet minimum reserve requirements (PMR) as stipulated by the central bank. The banking sector needed only 36.413 billion Sk to meet the requirement at the start, meaning that a 4.2 billion Sk balance was in excess.

Overnight rates dropped the most as a result of the surplus, but there were also decreases in the one-week and two-week rates. Long-term deposits up to six months, however, remained stable at about 17.90/18.40% p.a..

The slight downward trend in interbank rates continued until May 8, when the Ministry of Finance released a new issue of government treasury bills. In all, mostly banks snapped up bids worth 2.2 billion Sk with an average yield of 14.21% p.a., but that outpaced the 3.4 billion Sk demand. As a result of the ministry's action, overnight, one-week and two-week deposits all showed gains, while longer-term rates (2-6 months) went down.

On May 14, the calmness ended. The central bank refinanced the market by only 3.5 billion Sk, which shook the market as traders were unsure whether the banking sector could pick up the slack and meet the PMR. Due to this nervousness, overnight deposits increased to 31.50/32.50% p.a. because some banks, afraid that the NBS would not put enough money into circulation, tried to fulfill their requirements ahead of time. Interbank turnover was extremely heavy at 22.5 billion Sk, the second largest turnover this year.

On May 15, the market started to quote lower overnight deposits (at 26.00/27.00% p.a.) because banking experts saw that the NBS had put in nearly the amount that the sector needed. Needing 6.3 billion Sk to meet the PMR requirements, the banking sector requested more than 7 billion Sk in repo tenders to meet it. However, the NBS calculated the banking sector needed 6 billion Sk, and organized repo tenders for that amount.

The banking sector met the PMR at 99.95% p.a., meaning that the market needed about 280 million Sk to meet the PMR at 100 percent. This marks the second time this year the NBS didn't calculate exactly what the market needed, but since it's a small amount, we think it was only an accounting error.

For the next couple of weeks, we expect prices to stay around 18.00/19.00% p.a. for all term deposit rates.

Looking a little further ahead, we think the NBS will steer the money market through repo tenders, as it continues its quest to stabilize interbank deposit rates. It all depends on the NBS and its refinancing of the sector. We expect that there will be a daily deficit in the banking sector of roughly 3 billion Sk until the end of May, when all banks have to meet the PMR requirements again. It's hard to say if the NBS will take any additional steps with the market, as it's waiting to process the latest M2 data before it makes any other big moves.


POSS ADDS

Slovak crowns from the NBS last day to fulfil minimum reserve requirements in period from 15.4-30.4.1997. repercussions from the central bank's actions from the previous week. On April 30, On May 5 market started with slight decrease in short term deposit rates up to one week. Last day of April the Slovak Central bank refinanced the market through refinancing repo tender. Banking market needed about On 1-st may there were holiday in Slovakia, so this balance remained and this had an impact on This day started a new period of minimum reserve requirement (PMR) and market needed only to fulfill criterion. So there were surplus about crowns in the market and first day sector started to fulfil PMR on 111.68 percent on daily average basis. During the next few days this number this came down nearly to 100 percent. At this days to 8-th may market fulfilled PMR without Central bank refinancing repo tenders. One day deposits decreased to 14.80/15.80 % p.a. from 16.0/17.0 % p.a., one week deposits from 16.75/17.25% p.a. to 15.90/16.40 % p.a., two weeks deposits from 16.75/17.25 % p.a. to 16.40/16.90% p.a. Long term deposits up to six months remained quite stabile about of PMR (15.may) increased. One day deposits were quoting 22.00/23.00 % p.a. one week deposits interest rates has changed to 18.60/19.10 % p.a. The Next day

The start of the second week was relatively quiet as the central bank assisted the market in meeting the PMR through refinancing repo tenders. This stabilised the market, with daily turnover hovering around 10 billion Sk.

In the last cycle, the banking sector needed a 40.6 billion Sk injection from the NBS to meet the PMR.

This caused the interest rates of deposits with maturity in the PMR period to May 15.


Expect Sk in 60 pt. range

The first week was calm on the Slovak forex market as London and Bratislava each had one-day holidays. The Slovak currency index opened at 1.0065 on May 5 and moved very little after.

In the second week, the Slovak forex market mostly reacted to developments on the Czech market. Some speculators did come in, though, trying to weaken the Sk, but it remained in good stead because of its interest rate differential and because investors for the most part were concentrating heavily on the Czech market.

The two-month freefall of the Czech crown continued, dropping to a trading level of 1.066 against the Sk on May 15, its lowest level since the Slovak Republic's founding. On May 15, the Czech crown index weakened to 1.0525 - a 5.25 percent devaluation and an almost 11 percent loss of its value since mid-February.

The Czech crown's volatility and the Sk's lesser fluctuation precipitated the intervention of both countries' central banks. The Slovak national bank fixed the index at 1.0025 lower than the market index of 1.0050 for the first time in the last 2-3 weeks. The move showed the NBS didn't want the Slovak forex market to develop the same way as the Czech, meaning they didn't want a mass buying of hard currencies at the Sk's expense. The Czech national bank, meanwhile, intervened for only the second time ever, selling almost $1 billion to support the Czech crown through some banks on the market.

We expect the Sk index to be traded in a 60 point range, between 1.0040 and 1.0100, mainly because the Slovak market is calmer, and it's in the NBS's interest to keep the Sk stable. Traders, though, are closely watching developments on the Czech market, knowing that if the Czech crown were to be devalued, the Sk would most likely need to follow suit.

POSS ADDS

On May 12, the started to fall as foreign investors bought hard currencies from the Slovak market. Movement of IDX finished at the level 1.0045.

On Tuesday market sentiment completely changed and we moved to 1.0025 IDX. Some foreign speculators tried to move our currency IDX up and weaken the crown.

On Thursday the Czech crown weakened to 1.0525 a 5.25 percent devaluation.

Things picked up in a big way on May 9 as a selling spree caused the index to fall from 1.0040 to 1.0025. However, the downward push was arrested by speculative buying, and the index nudged back up to 1.0045.

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