Oct 11, 2016

This week in focus: Rising inflation increases probability of no key rate cut

September CPI readings showed an increase of 7.9% on y/y basis, while posting 1.3% growth in m/m terms. The Inflation rate is likely to reach the year-end projection of 12% y/y.
We expect the NBU to decrease the key rate to 14.5% as of end-2016. Although, should the prices accelerate more than anticipated, the NBU might keep the key rate unchanged on the next MPC meeting on October 27.

Currency market: USD/UAH steady in the short term

USD/UAH decreased slightly to 25.84 as of October 7, which is little change form the last weeks closing level of 25.93.
The NBU intervened into the market on October 7, purchasing USD 18.1 mn, capitalizing on the current absence of volatility and subdued depreciation risks.
In our view there are no fundamental factors that might cause heavy exchange rate swings. 
We are re-stating our projection that markets should expect fluctuations of USD/UAH in the 25.5-26.5 band. The mid-to-long term UAH depreciation sentiment is likely to persist with the year-end USD/UAH rate expectations remaining unchanged at 27.0.
EUR/USD swung up and down throughout the week, eventually pairing losses on disappointing US payroll data and landing at 1.1134 on Friday the 7th.

Money market: No pressure on the yield curve as liquidity remains subdued

Aggregate banking liquidity dipped slightly below UAH 80bn threshold again, landing at UAH 77.9 bn on Friday the 7th.
Liquidity didnt recover since there were no injections from the NBU, while VAT refunds and other MinFins expenditures were not significant. Going forward, aggregate liquidity is likely to oscillate slightly higher than UAH 80 bn at least in the mid-term. 
Money market rates remained level: cost of ON funds is around 13/14%, indicative 1 week is 14/15% while indicative 1M is 15/18%, according to our data.

Local debt market: Demand will likely concentrate on FCY auctions

MinFin is likely to offer EUR-denominated bonds this month, with yields probably landing at 4.5-5.0%. The last time EUR-denominated bonds were offered in April 2014 at 7.5% yield.
The last OVDP auction, held on October 3, yielded no proceeds. 
It is likely that demand for UAH-denominated bond will be subdued and will concentrate on FCY-denominated bonds. However, even FCY-denominated bond placements probably will be limited at around USD 100 mn.

Global markets: Stocks fall as economic concerns dominate

Financial markets rolled back on growing concerns that include a looming FED rate hike, the beginning of the third-quarter earnings reporting season, and the announcement that BREXIT negotiations will begin March 2017. Major safe haven assets declined. 
The September US non-farm payroll data is likely to keep FED on track for a rate hike till year-end. Coupled with growing hourly earnings and increasing labor participation rate, the data was strong enough to weight down stocks and prop up the USD.
On Monday UK PM, Theresa May, made a surprise announcement that she intends to activate Article 50 no later than March 2017, which will effective start the UKs exit from the EU. Although a more definite timetable removed some uncertainty, UK sovereign bonds experienced a selloff. 
Chinese FX reserves slumped to the lowest level since April 2011, as pressure on Yuan is building up, which is in part due to the strengthening USD. Another issue that causes mounting concerns is the developing Chinese housing bubble, as property sales increased by 39% in the first eight months of the year.
Oil prices experienced a rally late in the week, driven by a surprise decline in US oil inventories.

For more information: UkrSibbank_11102016.pdf