Sep 19, 2016


This week in focus: UAH is on track to gradually depreciate in spite of the IMF deal 


UAH has strengthened substantially in the wake of the successful conclusion of the IMF deal, however fundamental are still to keep deteriorating, which is likely to depreciate the local currency in the mid-to-long run.
We maintain the year-end projection of the USD/UAH rate at the 27.0 level, although volatility on the market should be somewhat subdued.


Currency market: USD/UAH breached the 26 level, but likely to bounce off the bottom in the short term 


USD/UAH landed at 25.82 on September 16, down from the last weeks closing level of 26.78, as the conclusion of the EFF program review turned the tide on the FX market.
The NBU conducted only one market intervention with a purchase of USD 19.7mn, capitalizing on strengthening of the local currency.
On September 14, the IMF board decided to allocate USD 1bn to Ukraine, completing the second review of the EFF program and setting the stage for further cooperation. 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 slid to 1.1155 as of Friday, as higher than expected US inflation readings have strengthened the probability of a FED rate hike.


Money market: Liquidity markedly subdued


Aggregate banking liquidity slightly recovered, climbing to UAH 71.8bn, although still being markedly subdued.
Liquidity is likely to start recovering as soon as the central bank will be allowed to use its profits of UAH 38bn, which is now impossible since the Supervisory Council still hasnt been appointed.
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 to remain week at least in mid-term


On the last OVDP auction no bids were submitted, only 2 bids were submitted both for long term bonds, while the cut-off rate remained unchanged comparing to the previous analogous placement. Total proceeds were insignificant, amounting to UAH 10mn.
Demand for UAH-denominated bonds might begin recovering as soon as the system liquidity is restored, although pressure on the yield curve is unlikely to be strong with yields are likely to hovering around 16% in the mid-term.


Global markets: Global assets hurt by rising volatility


The week was marked by growing global asset price volatility. Early in the week concerns regarding central banks might be signaling that they are rethinking extremely easy monetary policies almost prompted a global selloff, while fresh US inflation readings sank the markets on Friday.
Yields on US 10y Treasuries climbed throughout the week, while benchmark 10y German and Japanese bonds saw yields declining. 
Fridays US CPI readings were higher than expected, delivering an unpleasant surprise to markets. The US dollar gained against it peers while bets on rate FED rate hike strengthened.
The Stoxx 600 market gauge lost 3.2% week-on-week, with financials suffering the most.
The MSCI Emerging markets index declined by 2.6%, unable to recover after the Monday selloff.
Chinese housing prices posted the biggest increase in the last six years, signaling that governments efforts to curb the development of a housing bubble are not fruitful.
Crude oil fell throughout the week after Libya and Nigeria had announced that they are ready to boost production, further exacerbating the market glut.


For more information: UkrSibbank_19092016.pdf