Thursday, May 29, 2008

Record Koruna Revaluation to Set the Final Conversion Rate

    At the request of Slovak authorities, the central parity between Slovak koruna and Euro within the ERM II system has been moved for the second time, this time by 15% from 35.4424 to 30.1260 SKK/EUR on May 28. The revaluation is the most significant movement of the central rate in the history of the European exchange rate mechanism. In case of Ireland and Greece before 2002, the changes were by three and three and a half percent respectively. The change is a reaction to the positive assessment of the Slovak euro bid by the European Commission from the beginning of May and a significant appreciation of the Koruna exchange rate due to healthy economic fundaments during the last two quarters.

    The new exchange rate center will most probably constitute the final exchange rate as Slovakia switches to Euro in January next year, since no country has yet joined the Eurozone with an exchange rate different from its central parity, and another revaluation is highly unlikely. 

    The Koruna revaluation appeased the bullish market that continued to trade Slovak currency at ever stronger positions in May. Verbal assertions of the Slovak PM Robert Fico as well as NBS governor Ivan Šramko stating that there is a room for koruna appreciation helped to move the exchange rate to new all-time highs. Another driving factor of appreciation was low risk aversion of global investors, which has fallen to ten-month lows according to standard proxies (VIX and global macro-risks indices). From SKK 32.25 for a Euro at the beginning of May, Koruna appreciated to record 30.616 SKK/EUR on May 28, 2008 – shortly before the revaluation, and up to 30.087 SKK/EUR on the following day. This makes Slovak Koruna the most appreciating currency vis-à-vis Euro in the world since 2005. The local currency’s year-on-year strengthening averaged at above six percent in the last three and a half years. Czech Koruna and Polish Zloty appreciated on average by slightly more than five percent each year. Against the dollar, Koruna strengthened to levels below 20 SKK/USD for the first time in history. The record now stands at 19.254 SKK/USD.

    In the future, no further significant movements of the exchange rate from the new parity are to be expected, however. We expect the new rate to be confirmed as the final conversion rate by the EcoFin on July 8, since it approximately constitutes already the 2009 equilibrium exchange rate. Worries springing from the record currency appreciation, 11.1% in year-on-year terms, have already spread among exporters, who produce in Korunas but earn in Euros. It is thus reasonable to anticipate that the trade surplus predicted for 2008 will be, as a result, a bit smaller than expected.

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