May 31, 2016

This week in focus: The NBU cuts the key rate, more easing to come 

The NBU cut the key interest rate to 18% effective May 27th. The central bank officially stated that its inflation targets are 12% and 8% for the end of 2016 and 2017 respectively.
In the end of the year we expect the NBU interest rate target to be in range of 14-16%, which is approximately 2% higher than our projected inflation rate (and 4% higher than the NBU target).
We expect the next substantial policy move from the NBU, most likely a key rate cut of several percentage points, to be made in July 2016, following the IMF disbursement. Before that time the central bank, while clearly aiming for easing of the regulations, may lack the ground necessary to carry out the policy changes.

Currency market: USD/UAH flattening right above 25

USD/UAH has kept its strengthening trend, albeit with a slower pace. On May 27th USD/UAH closed at 25.13, as the USD gained against almost all major peers.
Our projection is 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. The outlook is based on medium-term expectations of a decline in steel prices.
EUR/USD has been depreciating for the past several weeks and closed at 1.111 on May 27th.

Money market: Policy easing drives the money market rates down

Banking liquidity landed at UAH 95.1bn level on Friday the 27th. Lower levels of liquidity are attributed to settlements on new sales of sovereign bonds, as well as to month-end tax payments.
The key rate cut by the NBU is pushing the interest rates downward. New cost of ON funds is around 15.5/16.5%, while indicative 1 week is 16/18% and indicative 1M is 18/20%.

Local debt market: MinFin is expected to keep decreasing rates

The next OVDP auction is scheduled on the 31st of May. We expect the MinFin to keep driving the cut-off rates down the way it has been doing for the previous several weeks. 

Global markets: G7 meeting in Japan; EM countries bond placements

The 42nd summit of G7 was held in Japan on May 26-27. A wide array of socioeconomic issues was on the agenda, however, no palpable consensus has been reached regarding the economic issues.
The suspense regarding the possible rate hike by the FED keeps growing. In the last weeks key speech FED Chairwoman J. Yellen said that a rate hike is appropriate in the upcoming months.
Last week the sovereign bond market was highly active. After a USD 1.75bn bond issue by Russia, Qatar USD 9bn placement in three maturities, while the City of Buenos Aires sold USD 890mn of bonds with a 7.5% coupon on May 25.
Concerns of the Emerging markets performance persist, as the Chinese Yuan is losing its favorable position of strength versus the US dollar and weakness relative to the currencies its trading partners.

For more information: UkrSibbank_310516.pdf