Oct 18, 2016

This week in focus: Growing deposits signal of recovering financial system

In September 2016 solvent bank increased their UAH deposit portfolio by 1.9% m/m, while YTD growth landed at 6.7%. FCY-denominated deposits remained unchanged. 
We expect that the financial system will continue recovering, with the banking sector starting to credit the real economy in 2017. Interest rates are likely to resume their decrease in lock-step with the NBUs key rate.

Currency market: USD/UAH dips to 25.79 as moderation persists 

USD/UAH drifted lower to 25.79 as of October 17, down from the last weeks closing level of 25.84.
The NBU intervened into the market three times last week, purchasing USD 54.9mn, using the opportunity to increase FX reserves given by the appreciating UAH.
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 slumped to 1.0972 as of Friday the 14th, as the USD sizably strengthened against its major peers

Money market: NBUs injections insufficient to recover aggregate liquidity 

Aggregate banking liquidity slid to UAH 76.0bn. Even though the NBU supported liquidity through its FCY auctions and issuance of new loans, it was not enough to reach previous weeks levels. Aggregate liquidity is likely to be weighted down by end-of-month tax payments as October moves to conclusion. 
Money market rates remained level: cost of ON funds is around 15/16%, indicative 1 week is 14.5/16.5% while indicative 1M is 15/17%, according to our data.

Local debt market: Yield curve pushed down

On the last OVD auction MinFin placed UAH 1.6bn of bonds also managing to slightly flatten the yield curve. Comparing with previous analogous placements, rates on 9m bonds declined by 20b.p to 15.3%, while rates on 2y bonds slid by 50b.p. to 15.5%. The cut-off rates on 1y bonds remained unchanged at 15.20%.
While the yield curve should be expected to keep flattening on the next auctions, with the long end of the curve landing at ca. 16%, however a more substantial move in cut-off rates will likely be conditional on the NBUs key rate policy. Should the regulator cut the key rate, MinFin will get more ground to drive the curve further down.

Global markets: Global demand concerns fail to stoke volatility

Although the markets came under pressure following the news of slumping Chinese exports, last week was pretty unremarkable. Global benchmarks paired mid-week losses incurred due to the mixed news from China and posted almost no changes week-on-week. 
Yields on safe haven assets increased almost insensibly. 
The US financial markets were shaken by the revelation that the FOMCs September decision not to raise the federal funds rate had been a close call. Currently the markets are pricing in a 66% probability of a rate hike in December. The US dollar gained against its peers.
The Stoxx 600 index closed at the same level as the previous week, after pairing mid-week losses of -1.7%. The British pound sank to a record low against its peers, in turn weighting down sovereign bonds. Concerns are growing over the possibility that sterlings weakening might stoke inflation.
The latest batch of Chinese data hack sawed the markets, as Chinese exports fell by 10% y/y, the biggest the biggest drop since February, while imports declined by 1.9% y/y. The negative developments have put an additional weight on Yuan, which is already trading near six-year lows against the USD. 
Crude oil traded above USD 50 per barrel amid speculations regarding output cuts. WTI one month futures closed at USD 50.35 per barrel, while Brent closed at USD 51.95 per barrel.

For more information: UkrSibbank_18102016.pdf