ICU Weekly Insight, 23 October 2023 - NBU Maintains Full Control of FX Market

Bonds: Trading concentrates in FX bonds again

Last week, trading in FX-denominated instruments again dominated the market.The MoF sold only UAH-denominated bonds at the primary auction last Tuesday and borrowed more than UAH9.2bn (US$254m) with only minor changes in interest rates. See details in the auction review.In the secondary market, investors focused on FX-denominated bills for the second consecutive week, and trading in FX instruments exceeded that of UAH papers by 56%. The largest volume of transactions was with USD-denominated paper due February 29, 2024—UAH5.9bn (US$161m), or almost 65% of all trades with FX-denominated bonds. Trading in the USD-denominated paper issued two weeks ago amounted to UAH1.8bn (US$49m), or 19% of all transactions with FX-denominated bills.Non-banking investors (legal entities) bought FX-denominated bonds last week for UAH2.2bn (US$60m).

ICU view: Investors continue investing in FX-denominated instruments to reinvest proceeds received via redemption of similar bonds three weeks ago.Tomorrow, the MoF will offer two new military bills denominated in local currency and US dollars. Given strong interest in FX-denominated securities, there may be an oversubscription for new paper, and the MoF will be able to sell the planned volume (US$300m), and receive sufficient funds to repay this week's US$345m redemption.

Bonds: Eurobond prices decline on global sentiment

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Ukrainian Eurobonds declined on worsening global sentiment.Last week, Eurobond prices lost an average of 5%, falling to 23‒31 cents per dollar, with the price range for instruments with different maturities widening to 14%. VRI prices slid by 4% to below 41 cents per dollar of notional value.

ICU view: Sentiment for emerging markets worsened as the EMBI index slid by 1.4%. The adjustment in prices of Ukrainian Eurobonds was more significant due to lingering uncertainty regarding the fate of US financial assistance for Ukraine. We expect high volatility in Ukrainian Eurobond prices and continued negative sentiment until the House of Representatives resumes its work and reviews President Joe Biden's large aid package for Ukraine and Israel.

FX: NBU maintains full control of FX market

Last week, the official exchange rate slightly weakened, returning close to the level that existed before the NBU’s transition to a flexible exchange-rate regime.In the interbank market, bank clients (legal entities) increased hard-currency purchases by approximately 10%, with slight decline in the sales volume by 2% (in four business days). Therefore, the NBU had to increase weekly interventions by 28% to US$735m.

ICU view: Legal entities increased their hard-currency purchases pushing the official USD/UAH exchange rate slightly down. The NBU continued to use international reserves extensively to meet excessive demand. Slight fluctuation in the interbank market had minimal impact on the exchange rate in the retail market.