Sep 13, 2016


This week in focus: CPI is likely to land at NBU target 


August inflation reading showed an increase of 8.4% on y/y basis, while still posting deflation of 0.3% in m/m terms.
Year to date, inflation rate stands at only 4.5%, so even factoring in a sharp seasonal increase in domestic prices, year-end CPI is likely to be at 12% target set by the NBU.
We believe there will be only marginal changes, if any, to the key rate at this weeks MPC meeting.


Currency market: USD/UAH stabilized at 26.61 - here comes the cavalry 


USD/UAH landed at 26.61 on September 12, lower than the last weeks opening level of 26.75. Positive political developments seem to have stabilized the currency and mitigated volatility to a certain degree.
The NBU conducted 4 market interventions, cumulatively selling USD 87.2mn. The regulator is likely to keep selling FCY in order to keep exchange rate volatility in check, although less frequently than during the last two weeks.
In a long awaited move, the IMF Board scheduled a decision on the second review of the Extended Fund Facility program to be made on the 14th of September. 
Going forward, we would suggest 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 forecast remaining unchanged at 27.0.
EUR/USD increased to 1.1264 as of Friday, as the euro strengthened after the ECBs decision not to expand its stimulus program.


Money market: Liquidity is likely to hover near the upper bound of UAH 80bn


Aggregate banking liquidity slid again to UAH 73.6bn.
Going forward, liquidity might recover to approximately USD 80bn but not significantly more than that, as the NBU ceased to be the source of liquidity replenishing. The level of liquidity will likely be mostly impacted by MinFin expenditures (including debt repayments) and VAT refunds. 
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 absent


On the last OVDP auction no bids were submitted, illustrating a complete absence of demand for UAH-denominated government bonds. 
As the threat of a sharp devaluation of the local currency has ebbed, demand for UAH-denominated OVDP might begin to slowly recover, although we expect the pressure on the yield curve to be weak, with yields leveling off at ca. 16%.


Global markets: Waning perspectives of monetary stimulus upset the markets


The ECBs decision to take a pause in expanding its stimulus program has stoked concerns that central banks around the world will start re-evaluating the benefits of extremely easy monetary policies. Asset of all classes slid, as the EU regulators inaction coincided with the BoJ signaling that its stimulus might not be working out that well.
Bonds, safe heaven assets included, declined globally. Yields on Japanese, UK and US bonds climbed. German 10y bonds saw their yields rising above 0% for the first time since July. 
The ECB made no changes to its policy stance, underwhelming analysts, since most bets had been put on the QE programs expansion after the regulator adjusted its inflation and growth projections downward. The Stoxx 600 index posted a weekly drop of 0.5%.
The S&P 500 index slumped by 2.3% throughout the week due to rising bets of a rate hike by FED.
Chinese officials allowed a link between offshore and onshore stock markets to be established, causing the Hang Seng index to rise to a one-year high in anticipation of inflows.
Crude oil retreated after making advances earlier throughout the week as a surprise slump in US stockpiles had been ruled to be a one-time event caused by adverse weather conditions. WTI 1m futures closed at USD 45.88 per barrel, while Brent closed at USD 48.01 per barrel.


For more information: UkrSibbank_13092016.pdf