This week in focus: Ukraine’s inflation passed the bottom
Inflation in Ukraine re-accelerated from 6.9% to 7.9% y/y, ending long term disinflation trend and limiting potential for further policy cuts this year.
We expect CPI inflation to accelerate to 13.0% as of year-end and we expect NBU to cut policy rate twice (totaling 100 b.p.) by the end of 2016.
Currency market: USD/UAH at 24.82 – UAH to gradually weaken
USD/UAH climbed to 24.8275 on June 8, after temporarily declining to 24.78 on Thursday.
Last week the NBU released the data on its FX reserves, which amount to USD 14.1bn as of August 1. At the same time the regulator had previously decreased it forecast for year-end reserves to USD 17.5bn.
EUR/USD decreased to 1.1086 as of August 5, down from 1.1176 the week before.
Money market: Liquidity will recover as soon as NBU resumes FCY purchases
Aggregate banking liquidity amounted to UAH 96.5bn on August 5. Liquidity ebbed in part due to loan repayments to the NBU, while the regulator didn’t replenish the losses through its FCY purchases.
Money market rates remained level: 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: Demand for govies is losing steam
Cut-off rates are still likely to decrease on upcoming auctions, albeit slightly, eventually flattening out at ca. 16% in the mid-to-long term. The rate on USD-denominated bonds might be expected to level off at ca. 7%.
Going forward, USD-denominated OVDP auctions are unlikely to amount to more than USD 100mn per month, whereas up to 30% of bids with rates that are above the cut-off might be accepted by MinFin.
Global markets: US economy counterweights feeble growth elsewhere
Global stocks powered forward to new heights on strong US economic readings, extending gains over the weekend. Commodity markets followed suit.
BREXIT’s projected impact on the World economy has been revised downward. BNPP’s estimate of global growth for 2016 remains at the pre-BREXIT level of 3%, although the forecast for 2017 has been trimmed by 0.1% to 3.3% y/y.
The US economy surprised the markets with better-than-expected payroll, retail sales and industrial output data, although also bolstering speculations regarding a FED rate hike in 2H 2016.
In order to prop up the economy and fend off resurging risks of deflation, ECB is likely to extend its asset purchasing program in September.
Emerging markets turned more bullish as anticipation of global stimulus and solid US data have stoked demand for high-yielding assets.
Oil gained after temporarily sliding below USD 40 per barrel, however market oversupply is unlikely to abate in the near future.
For more information: UkrSibbank_09082016.pdf