January 19, 2016

This week in focus: UAH deposits show one-off surge in Dec

UAH deposits of households spiked by record UAH 12.6bn last month (UAH 18.0bn less insolvent banks). As the end-year state budget payments dry up, pace of the UAH deposit growth will reduce as well, and the observed weakening of the UAH may further deter savings in the domestic currency. While the local currency liquidity of the banking system stands at its all-time high, implicit pressure on the UAH will stimulate the NBU to keep interest rates elevated and thus discourage demand for cash FX. 

Currency market: UAH expected to rebound, but likely to stay above 24

Pressure on the UAH has grown. As of this afternoon, the currency pair traded at 24.95/25.25 and the black market rates have reportedly reached 27.15/27.40. NBU responded by a series of FX sales, having sold nearly USD 60mn on Jan15, 16 and 18 at the weighted average of UAH 24.4 per USD.  Today, FX sales have continued and the cut-off rate spiked to 24.7. Pressure on the UAH may ease in the coming days as FX supply will recover. We nevertheless do not expect the USD/UAH to move back to 24 and below, and would rather expect it to stabilize between close to 24.5. As the situation on the FX market settles, the NBU will likely step in to defend the 25 threshold, and will buy FX when the USD/UAH nears 24. Going forward, UAH expected to weaken further this year and are sticking to our end year forecast of UAH 30 per USD.

Money market: MinFin OVDP auction: testing new levels

Banking liquidity has reached a new record (UAH 121.8bn), in spite of zero liquidity support from the central bank this year. Coupled with a surge of state budget payments last month, liquidity is driven by payments on MinFins local currency notes, as well as interest payments by the NBU. Abundant banking liquidity calls for new UAH OVDP placements, given an expected rise of state budget deficit this year. Against this backdrop, MinFin undertook a UAH OVDP auction last week, having raised UAH 100mn at 18.5% for a 1Y maturity. As the rate is somewhat behind the market, the notes were likely purchased by a state-owned bank. Today MinFin offers UAH OVDP maturing in 6M, 9M, 1Y and 1.5Y (instead of the initially announced 3Y). The offering looks like an exercise to test the market for different maturities. Against this backdrop, the government may choose to pick up shorter durations going forward, so as to make its borrowings cheaper. Other offerings include FX notes due in 1.5Y. Given its relatively long tenor, the placement seems to be a pre-arranged deal.

Global markets: Crude prices weighed by Iran, backed up by record China consumption

IMF cut its global growth forecast by 0.2% for both 2016 and 2017 (to, respectively, 3.4% and 3.6%), citing a sharp slowdown in China and low commodity prices, detrimental for other emerging markets. Other risks included further dollar appreciation and an escalation of geopolitical tensions. Oil prices headed south to below USD 29 as sanctions on Iran were officially lifted. Markets however expect Iran's full return to oil markets to be relatively slow following years of under-investment. Following suit, Russian RUB dropped to its new lows, having touched 79.3 per USD, while Russias government revised its 2016 GDP forecast to -0.8% from previous +0.7%. Later on, crude prices recovered to around USD 30 per barrel as estimates showed that Chinese oil demand likely hit a record high in 2015. RUB responded accordingly, having strengthened to 78.5 per USD. 4Q 2015 China economic growth slowed to its weakest pace since 1Q 2009 (6.8% y/y vs. 6.9% y/y in 3Q 2015). Slowing Chinese growth remains a major concern, playing down investments and setting off potential benefits from the lower energy costs.

For more information: UkrSibbank_190116.pdf