June 14, 2016

This week in focus: Inflation likely to be in the low double digits going forward 

CPI decreased to 7.5% y/y in May 2016, further down from 9.8% y/y the month before. It is highly probable that form this point the inflation rate will begin to accelerate as new household utility tariffs will come into effect on July 1, export revenues are very likely to decrease, whereas the NBU reconfirms its intentions to ease the monetary policy.
We expect the inflation rate to start accelerating in the nearest future and eventually reach 14% y/y by the end of 2016.

Currency market: USD/UAH flat around 25

As anticipated, USD/UAH breached the 25 threshold on June 3rd, and has been hovering slightly below it since then, closing at 24.9950 on Friday the 10th.
Capital and currency controls are being gradually lifted, to reflect FX liberalization commitment and to support weaker UAH on levels that would allow NBU to continue accumulating reserves.
We are keeping our projection that UAH will likely appreciate against USD to approximately 24.5 during the next 2-3 months, while the outlook for the end of 2016 remains at bearish 27 level.

Money market: Policy easing drives the money market rates down

Banking liquidity increased above UAH 100bn and landed on Friday the 10th at UAH 101.8bn level, increasing by UAH 9bn from June 6. Liquidity is recovering due to FX purchases by the NBU and is expected to continue increasing.
Money market rates stayed level: cost of ON funds is around 15.5/16.5%, indicative 1 week is 16/18% while indicative 1M is 18/20%, according to our data.

Local debt market: MinFin keeps decreasing rates

Cut-off rates for 2y bonds decreased again by 0.5% (to 17.5%) on the last OVDP auction.
Demand for bonds is expected to pick up on the last two auctions before the MPC meeting as market participants are anticipating further rate cuts that will drive down the yields. 

Global markets: Global concerns persist

On the 7th of June the World Bank issued its bi-annual Global Economic Prospects report, in which it lowered the expected growth of the worlds economy to 2.4% for 2016, down by 0.5% from its previous January 2016 projection of 2.9%.
Bonds rose last week, as investors are flocking to safety in the light of forthcoming key events: FED meeting on June 15, the Bank of Japan policy meeting on June 16 followed by a BREXIT referendum the week after that on June 23. At the same time EM countries continue the recent issuance streak.
ECB began to buy investment grade corporate bonds on June 8, in its latest attempt to spur inflation in the Euro area.

For more information: UkrSibbank_14062016.pdf