NOVEMBER 14, 2016

This week in focus: Inflation spike decreases probability of NBU hike in December

Ukrstats latest inflation readings show that in October 2016 CPI increased to 12.4% y/y, up from 7.9% y/y in September. 
As inflation is  already inching above the NBUs year-end target , it is likely that on the only remaining MPC meeting in 2016 the rate cut will be symbolic at most, falling into the 0.0-0.5 p.p range.

Currency market: Local currency on track to gradually depreciate 

The USD/UAH was flat last week, as the local currency weakened by approximately 0.2% against USD week-on-week with most of the movement happening on Friday the 11th. The FX market closed at 25.62.
The NBU was absent on the market, as the last intervention had taken place on November 4. Since the end of September the regulator has purchased ca. USD 300 mn without causing any additional volatility to the FX rate.
In our view the local currency is likely to keep slowly depreciating, as there are no major shocks in sight. Any spikes in volatility caused, among other thing by the result of the US presidential election are likely to be transient, with the exchange rate shortly reverting back to fundamentals.
Our projection of the USD/UAH rate path remains unchanged, namely that markets should expect fluctuations of USD/UAH in the 25.5-26.5 band, while the local currency is likely to keep gradually losing ground. 
EUR/USD fell to 1.0855, down from the last Fridays level of 1.1141.

Money market: Liquidity and rates steady

Aggregate banking liquidity changed little throughout the week, landing at UAH 82.5bn as of November the 11th, slightly down from UAH 83.2bn the previous Friday. As there were no significant inflows and outflows last week, liquidity was mostly supported by budget expenditures.
Money market rates remained level: cost of ON funds is around 12/13%, indicative 1 week is 13/14% while indicative 1M is 14.5/16.5%, according to our data.

Local debt market: Investors are far from accepting lower rates

The last OVDP auction yielded no proceeds, just like the previous one. Out of all offered maturities, only 2y bonds attracted 3 bids in amount of UAH 150 mn, which MinFin rejected due to uncompetitive interest rates. 
It is likely that the effect of the NBUs decision to cut the key rate is still settling in the primary bond market, as market participants are not comfortable with lower rates, demanded by MinFin.

Global markets: Surprise outcome of US elections roils markets
The outcome of the US election shocked the world as Donald Trump won the presidency with a substantial margin, against all expectations. The Republican Party has also secured both chambers of the Parliament and a handful of governorships, almost pushing out the Democrats to the political periphery. 
After the initial setback, equities powered forward on president-elect Trumps policy promises, while bonds sank globally. 
The S&P 500 surged by 3.8% week-on-week while the Dow Jones industrial average reached a record high. The FED is assumed to remain on track for a December rate hike, as Trumps victory brought along prospects of higher inflation, while the US labor market sends signals of its strength with declining initial jobless claims. 
European equities followed suit gained with the Stoxx 600 index increasing by 2.6% week-on-week.
Despite the recent positive economic readings, Chinese exports declined by 7.3% y/y, more than it had been estimated. Chinese FX reserves dropped by USD 45.7 bn suggesting that the Chinese government has been attempting to stabilize the Yuan.
Unlike developed markets, emerging markets were battered by the US elections results. Mexican peso was hit the hardest both because of the uncertainty regarding future US-Mexican economic relations and due to its status of a proxy for other EM currencies.
Crude oil prices resumed to slide as oil exporting countries are still struggling to cope with the market glut, since the long-awaited deal to reduce output is not showing progress.

For more information: UkrSibbank_14112016.pdf