May 25, 2016

This week in focus: Ukraine appreciation trend is likely to continue over next months

The commodities outlook is downbeat, with prices of iron ore projected to fall by 10-20% from current levels at the end of 2016. This results into fewer opportunities for the Ukrainian current account to materially improve. However Chinese government's readiness to implement more stimuli might somewhat cushion commodities prices from downside risk. Additionally, Emerging Markets are being undermined by appreciating USD due to a possible FED rate hike.
The ailing performance of the current account is expected to be mitigated by inflows into the capital account, which might amount to more than USD 4.8bn in 2016. These injections should cause sizable appreciation pressure on UAH due to an increase of FX supply in interbank market.
Since IMF disbursements are not approved yet, the NBU is likely to continue efforts to increase FX reserves in May-June, allowing for a slight appreciation. Should the tranche from the IMF be received in July, the regulator will get more ground to cut the key rate and relax capital controls.
In our view, UAH has a potential to appreciate to 24.5 and possibly more in July, following the tranche from the IMF. However, we are still conservative on USD/UAH rate evolution in Q3-Q4 2016 since the appreciation pressure is likely to be formed by financial inflows rather than fundamental improvements in the country’s current account.

Currency market: USD/UAH to test 25 level

Local currency has been strengthening progressively for the last two months, with a one-week period of depreciation from 6th to 13th of May, when USD/UAH peaked off at 25.45. UAH has been appreciating for the whole last week with the spot USD/UAH rate closing at 25.12 on Tuesday the 24th. Over the next weeks USD/UAH is likely to test the 25.0 level, under mixed signals from global markets.
The technical mission of the IMF left Kyiv on May 18th after a Staff Level Agreement (SLA) with the government had been reached. It’s expected that the second review under the EFF program will be concluded in July 2017 after the meeting of the IMF Board. A tranche amounting to USD 1.7bn is to be disbursed shortly afterwards.

Money market: MPC meeting likely to deliver a modest rate cut

Banking liquidity fell slightly below UAH 100bn last Friday and landed at UAH 98.3bn this week. This decrease can be attributed to tax payouts, which are due to be reversed in early June. Total liquidity slid down compared to nearly UAH 120bn as of mid-January 2016. Money market rates have not changed, since the NBU has maintained its policy stance. Cost of ON funds is around 17/19%, while indicative 1 week is 17/19% and indicative 1M is 19/22%, according to our data.
The next meeting of the NBU Monetary Policy Committee will be held on May 26th. A moderate rate cut could be on card, since the regulator gained more ground for rate cuts since inflation slowed down to 9.8% in April 2016. More substantial monetary policy moves could be anticipated after the July 2016 tranche from the IMF.

Local debt market: MinFin continues to decrease rates

The Ministry of Finance continued to decrease cut-off interest rates for local currency bonds. The cut-off rate for 2Y notes went down from 18.3% to 17.3% within one week. Cut-off rate for 1.5Y USD-denominated bonds was 7.6%.

Global markets: Emerging Markets out of steam; FED mulls over a rate hike

A rally in the Emerging Markets that began in February has slowed down as prices are retreating to fundamentals. Nevertheless, long term assessment remains positive, with Chinese regulators poised to introduce stimuli in order to keep the economy transition as soft as possible, while aiming for an annual growth target of 6.5%. Crude oil rebounded slightly but couldn’t beat the USD 50 mark.
FED’s dovish sentiment that had made the EM rally possible changed recently. US economic data is rather decent and the recent FOMC meeting minutes reconfirmed that the FED may be on a track to increase the rate in 2016. The Eurozone growth remains sluggish demonstrating a meager 0.5% growth in Q1 2016, while Hungary was upgraded to investment category by Fitch on the 20th of May.
On May the 23rd Russia issued USD 1.7bn of its first Eurobonds since the imposing of international sanctions.

For more information: UkrSibbank_250516.pdf