October 31, 2016

This week in focus: Weakness of the current account underscores the economys structural fragility

The financial account posted a USD 1.3bn surplus in September, moving the BoP into the green in spite of the current account widening its deficit to USD 875mn. 
As export deteriorates the economy becomes ever more depended on financial inflows. Our year-end GDP growth estimate remains unchanged at 1.2% y/y.

Currency market: USD/UAH slides to 25.49, UAH supported by agro season 

UAH has been exchange appreciating throughout the week with USD/UAH rate landing at 25.49 as of October 21, down from the last weeks closing level of 25.66. Appreciation of UAH has been supported by export revenues, namely due to exceptional harvests in the current season.
The NBU intervened into the market four times last week, purchasing USD 105.8 mn.
The arrival of the IMF technical mission was rescheduled for the beginning of November.
The NBU transferred to MinFin UAH 10 bn, the first part of UAH 38 bn of its profits. The total sum will be transferred in several tranches in order to attempt to avoid any shocks to the FX market.
We are re-stating our projection that markets should expect fluctuations of USD/UAH in the 25.5-26.5 band. 
EUR/USD increased to 1.0991, as EUR rebounded after falling last week on the news form the ECB.

Money market: Rate cut likely to have muted impact on yield curve 

Aggregate banking liquidity landed at UAH 82.4bn as of Friday the 28st. In the same fashion as The same as the previous week, aggregate liquidity was supported by NBU injections and refunds from the State Treasury. End-of-month tax payments were the only substantial factor to weigh on liquidity. 
Liquidity is likely to recover in the mid-term, as MinFin will ramp up expenditures after the NBU reallocates its profits.
On the October 27 meeting of its Monetary Policy committee the NBU decided to cut the key rate by 1p.p. to 14% which slightly exceeded our expectations. It is likely that the secondary market will be primarily affected by the cut, since interest rates on the primary market have already been low.
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: MinFin is likely to keep auctions limited due to its surplus of funds

The last OVDP auction provided UAH 4.3bn of proceeds, mostly due to the placement of EUR-denominated bonds. Cut-off rates for 9m and 3y UAH-denominated bonds didnt change comparing to the previous analogous placement, landing at 15.30% and 15.75% respectively, while the EUR bonds were placed at 4% rate.
In our view OVDP auctions in 4Q are going to be limited, as MinFin has a surplus of funds, including a USD 1.6 bn surplus of FCY in its account.

Global markets: Financial markets modestly decline

Stocks in the developed markets ended the week in the red, as the earning season delivers mixed results. Safe haven assets declined. Emerging markets were more resilient due to stabilizing prices of oil and inflow of funds from the developed markets. 
Mixed earnings data moved US stocks slightly lower, with S&P 500 posting a 0.7% weekly decline. US economic readings were mostly positive, with gauges of manufacturing and service sector activity modestly rising, while the Department of Commerce estimated that the US economy expanded by 2.9% y/y in 3Q 2016.
European stocks lost ground just like their North American counterparts, with the Stoxx600 gauge declining by 0.9% throughout the week. Outflow from the continent's equities continues as investors move their assets to emerging markets in the search for yield.
The Chinese currency continues to depreciate, moving ever closer to a 1.6% loss in October, which would be its biggest monthly decline since the abrupt devaluation in August 2015.
Crude oil prices declined by 4% throughout the week due to delays in striking the deal to ease the glut, as the non-OPEC oil producers are yet to agree to curb production.

For more information: UkrSibbank_31102016.pdf