Oct 3, 2016

This week in focus: Current account deficit to keep widening

August 2016 BoP readings showed a USD 414mn deficit of the current account, while the BoP ended the month with a meager USD 16mn surplus.
We are adjusting our year-end projection of the current account deficit to USD 1.5bn, which is equivalent to 1.7% of GDP.  The end-of-year GDP growth forecast remains unchanged at 1.2% y/y.
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.

Currency market: More of the same

USD/UAH climbed to at 25.93 on September 30, as the effect of substantial financial inflows began to wither.
The NBU conducted two market interventions last week, purchasing a total amount of USD 28.2mn.
Proceeds from September 22 USD 1bn Eurobond placement backed by US loan guarantees arrived to MinFin on Thursday the 29th. 
EUR/USD landed at 1.1235 of Friday, as the EU currency erased mid-week losses.

Money market: MinFin to reduce offer of FX bonds in 4Q 

Aggregate banking liquidity inched above UAH 80bn threshold, landing at UAH 80.7 on Friday the 23rd.
The Ministry of finance published the auction schedule for 4Q 2016, in which there are only two FX offerings, namely on October 25 and December 13 auctions. 
Smaller amount of planned FCY offerings is likely caused by the recent IMF tranche and Eurobond placement, which reduced the governments need for FCY. 
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 for UAH bonds is yet to recover

The last OVDP auction in Q3 2016 - held on September 27 - yielded UAH 5.0 bn of proceeds, mostly due to demand on FCY-indexed bonds. 
Cut-off rates remained the same comparing to previous analogous placements: at 16% for 2y bonds and at 6.5% for 7y indexed bonds.
Prospects of UAH depreciation will keep pushing demand to FCY and FCY-indexed bonds at least in the mid-term.

Global markets: Woes of Europes financial sector roil the markets

An eventful week saw global markets slumping and pairing losses, and pushing down yields on safe haven assets. Benchmark 10y sovereign bonds in US, Germany and Japan saw their yields decline.
European markets posted losses as the already struggling Deutsche Bank came under fire from the US Department of Justice, with the latter demanding USD 14bn in a legal settlement. Stock of Commerzbank and ING slumped after announcements of restructuring and job cuts. 
US stocks closed slightly up throughout the week, initially boosted on Tuesday after the markets concluded that Hillary Clinton had the upper hand in first presidential debate on Monday evening.
The Chinese manufacturing PMI remained at 50.4, the two-year high, somewhat easing pressure on authorities to apply stimulus. Moreover, Yuan has been added to the list of IMF reserve currencies in a first revision since 1999. The move is likely to boost the Chinese bond market, generating a USD 1 trillion inflow over the next 5 years, according to some estimates.
Crude oil rallied after the Organization of Petroleum Exporting countries agreed to cap oil production for the first time since 2008, although members individual contributions are still a moot point.

For more information: UkrSibbank_03102016.pdf