January 12, 2016

This week in focus: CPI inflation seen slowing to 14% by end-2016

Ukraine CPI landed at 43.3% y/y in Dec. Going forward, we expect the consumer inflation to slow to 14% by the end of the current year.
Currency market: USD/UAH likely to stick to 24 levels
Interbank USD/UAH hovered between 23.4 and 23.6 last week. Market activity has been rather low these days. Going forward, NBU is likely to allow / implement gradual devaluation this year, shifting the exchange band moderately to preserve macroeconomic stability. Fundamentals stay weak for the UAH as prices for ore and metals stick to their lows, neighboring CIS countries see their currencies heading down, capital outflows will likely persist in the short run and current account data is still negative for the UAH. In the near run, USD/UAH likely to stick to 24 levels though. As market activity will gain steam, pressure on the UAH may rise as sellers may test new levels and demand from importers is likely to re-emerge shortly. Pressure may also stem from the observed record UAH liquidity. At the same time, IMF disbursement expected in Feb 2016 is likely to be UAH-supportive, helping the NBU to make a prospective UAH weakening smoother. 

Money market: Rates stable against exuberant liquidity; MinFin back to primary market

Banking liquidity spiked to UAH 116-117bn in early 2016. Against this backdrop, money market sees prevailing offer. Interest rates are still stable, underpinned by high NBU depo rates. We believe the regulator will hold its policy rates high this year, in order to stimulate deposit growth and thuswise trying to put a lid on cash USD demand. Bringing down inflation will also be a focal point going forward as annual inflation rates are expected to hold at double-digit levels in 2016. MinFin returns to primary OVDP market. Announced placements commence today and will later include FX offerings. While FX placements will likely be used to simply refinance the maturing issues, the decision to launch local currency issues has apparently been driven by an expected rise of state budget deficit. While the current 1Y UAH bid yields are around 19.75%, MinFins readiness to accept such levels remains to be seen though. 

Global markets: As crude breaks below USD 32, oil currencies test new lows

Followed by other raw materials, Brent slid to USD 31.5 this afternoon (lowest since early 2004 and compared to around USD 37 just one week ago), weighed by further signs of the China slowdown. Strong dollar is also seen to be downside driver for crude. Not surprisingly, RUB fell to its historic low (76.5 per USD as of the time of this report), and other oil currencies have taken the same path. As traders bet on further declines, Nigeria's oil minister said today that a "couple" of OPEC members had requested an emergency meeting. Stocks are shaken as well. US equity market thinned by nearly 6% over the past week. Shanghai Composite has taken a few blows this year and has lost ca. 14% since late Dec 2015. 

For more information: UkrSibbank_120116.pdf