Aug 16, 2016

This week in focus: More UAH volatility going forward 

USD/UAH bounced off the bottom and entered a period of substantial volatility, underpinned by a pickup in import, FX outflow and delayed international financing.
We are expecting the rate to swing in the 25.0-26.0 band, whereas the year-end forecast stays at 27.0 level.

Currency market: USD/UAH jumped to 25.05 the first spike of volatility

USD/UAH jumped to 25.05 on August 12 the level last seen in the beginning of June.
NBU intervened into the market only once in August a sizable decline comparing to previous months. Should increasing volatility persist, the regulator is likely to begin selling FCY in order to stabilize the rate.
EUR/USD climbed to 1.1160 as of August 12, as the USD slightly weakened against its peers.

Money market: Liquidity is unlikely to increase in the nearest future

Aggregate banking liquidity landed at UAH 97.3bn on August 12. Liquidity shouldnt be expected to increase in the near future as the NBU is unlikely to ramp up its FCY purchases.
Money market rates changed after the key rate cut: new cost of ON funds is around 13/14%, indicative 1 week is 14/15% while indicative 1M is 15/18%, according to our data.

Local debt market: UAH bonds are out of fashion; demand to shift to USD govies

Demand should shift to USD-denominated OVDPs, since currently market participants have no interest in UAH-denominated government bonds.
Going forward, we are expecting cut-off rates to keep gradually decreasing on upcoming auctions, eventually flattening out at ca. 16% in the mid-to-long term. The rates on USD-denominated bonds might be expected to level off at ca. 7%, despite the current spike
On the last auction cut-off rates declined from their previous levels by 50b.p. to 15.7% for 6m bonds and by 27b.p. to 16.31% for 2y bonds.

Global markets: Save havens see demand as USD loses ground

Sovereign bonds soared worldwide mostly due to lukewarm US retail sales readings, which also send the USD to the lowest point in seven weeks.
Yields on US treasuries, German and Japanese bonds declined. Yields on 10y Chinese bonds hit the lowest level since 2006.
US retails sales readings underwhelmed investors by showing no change m/m, whereas The EU economy grew by 0.3% in 2Q 2016 according to Eurostat. However, this had little effect on stocks as S&P 500 remained near all-time high, while Stoxx 600 added 1.4% throughout the week, finally coupling BREXIT-induced losses.
MSCI Emerging Markets index ended the fifth week in a row in green, pushing the YTD advance to 15%, in spite of disappointing economic data from China.
Oil scored the biggest weekly advance since April, largely due to speculations regarding informal talks between oil exporting countries that are due next month.

For more information: UkrSibbank_16082016.pdf