UAH briefly touches 23/USD

Макроэкономика 11.01.2016 At the start of the year, the hryvnia was as high as 23.35/USD over the past week as prices on Ukrainian sovereign eurobonds rose in value (the bond due in 2019 was up 1ppt to 94 percent and the bond due in 2027 rose 2ppt to 89 percent) in reaction to news at the end of last week. Namely, German Chancellor Angela Merkel announced to German businesses suffering from EU sanctions on Russia that the Minsk 2 agreement would be fulfilled in a few months, thus ending sanctions that have been imposed on Russia. In our view, this market response is overly optimistic. Friday's jobs report on the US labor market was positive with 252,000 new jobs added in December and the unemployment rate remaining stable at 5%. Although the USD rose in reaction, enthusiasm cooled as real economic data in 4Q15 signaled a real GDP growth rate coming in below 1% rather than the previously expected 2%. The dollar index finished the day at 98.54 points, up 0.33% from the previous day, while the 10-year US Treasury note saw its yield decline to 2.1% on Friday. The Russian ruble was largely flat last Friday while the euro was down 0.09% while the hryvnia's trade weighted index was up 0.15% . The hryvnia's trade weighted index showed that its market exchange rate is overvalued by 10% (see Chart 15, p.7), implying a fair value rate of 25/USD now. Going forward, fundamentals are against a strong hryvnia. Hence, more weakness is ahead this year.