Aug 2, 2016

This week in focus: Despite robust June BoP figures uncertainty is elevated  

June 2016 BoP readings demonstrated a USD 377mn surplus while the current account demonstrated a surplus of USD 241mn. Notwithstanding the surplus, diverging price paths of key export groups, delayed international financial support and speculative fluctuations on the market increase mid-to-long term uncertainty.
We are keeping our year-end GDP growth estimate of 1.2% y/y, as well as the USD/UAH year-end rate at the 27.0 level.

Currency market: Another round of policy easing

USD/UAH bounced back to 24.80 at the end of the week, after dipping to 24.76 last Friday.
The NBU decreased its key rate by 1% to 15.5% effective July 29. As an additional policy easing move the regulator increased the maximum period for settlements on export-import operations to 120 days. The NBU is very vocal about its determination to liberalize the FX market and alleviate capital controls.
EUR/USD climbed to 1.1176 as of June 29, up from 1.0977 the week before.

Money market: Rates moving downward on NBU cut

Aggregate banking liquidity amounted to UAH 97.2bn on July 29, exactly UAH 1bn lower than the last weeks closing level of UAH 98.2bn due to outflows caused by end-of-month tax payments.
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: Cut-off rates are expected to decline

The rates are likely to keep gradually decreasing on upcoming auctions as the NBU has cut the key interest rate last week and remains to be vocal regarding its intentions to continue the easing. 
On the last OVDP auction, held on July 26, cut-off rates decreased by 0.05% for 1y bonds and by 0.1% for 2y bonds. Unlike the last time, 9m bonds didnt attract any demand.

Global markets: Stocks rally in spite of delayed stimulus

Last week FED decided not to change its stance on monetary policy whereas the Bank of Japan opted for a limited stimulus expansion. Markets are reshuffling projections for the next round of decision-making, as the ECB and the BoE also hadnt made any moves the week before.
Movements of save haven assets were discordant as yield on bunds and Japanese bonds increased whereas 10y Treasuries yields fell. 
Global stocks advanced, with S&P 500 reaching a new record high, Europe Stoxx 600 erasing all losses caused by the BREXIT vote and MSCI Emerging Markets posting the best monthly result since March.
US GDP grew in Q2 by annualized 1.2% instead of estimated 2.5%. However, FED reported on Wednesday that short-term risks to the economy have decreased, as consumer spending increased by 4.2% y/y, signaling about the underlying strength of the economy.
Oil posted the biggest monthly decline as oversupply is yet to be reduced.

For more information: UkrSibbank_02082016.pdf