Weekly review: NBU defends UAH, domestic borrowings by sovereign up

Local currency. The NBU reinforced its pragmatic policy towards the USD/UAH market and adhered to its implicit, pre-election policy target of keeping the nominal UAH exchange rate on a tight rein, i.e., firmly linked to the US dollar. It intervened in the FX market last week, offering USD at 8.02, indicating its desired level of the exchange. The recent globally heightened risk aversion sent the UAH nominal trade-weighted index to hover around a multi-year high (see Chart 1 on next page). Pressure on the UAH in the spot FX market is not likely to abate any time soon, however, reflecting the NDF market\'s view on investors\' bets projecting a weaker UAH going forward. This stance will likely not soften as for the UAH over the next couple of weeks, due to prevailing skepticism globally over the EU debt crisis resolution.

Domestic bond market. Last week, the MoF tried to rectify external debt problems with using domestic sources. Through cooperation with the NBU and state-owned and/or \"friendly\" banks, the MoF sold a significant volume of local-currency and FX-denominated bonds, and funds received will be in greater volume than the amount the MoF has to repay. This absorption of funds had a negative impact on banking sector liquidity, which resulted in an increase in money-market and secondary bond market interest rates.

Eurobond market. After elections in Greece and some temporary calming in the global financial markets, the YTMs of Ukrainian Eurobonds slightly flattened, but currently still remain too high for the Ukraine government to tap with a new Eurobond. At the same time, based on positive news from Greece, and if the situation in Spain does not spin out of control, Ukraine could begin preparations for the new Eurobonds issue sometime in July. A significant impact could also be made by tomorrow\'s redemption of the UKRAIN 6.385% \'12, totaling US$516m of principal and interest. Developments in the Eurozone-such as the outcome of the EC meeting this week and the ECB Governing Council\'s meeting next week-will also determine the risk appetite of debt investors of the Eurobond market as for the new sovereign Eurobond by Ukraine.
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