USDKZT volatility hit a two-year low

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1 RESEARCH AND KNOWLEDGE MANAGEMENT 22 November 2017 USDKZT volatility hit a two-year low USDKZT traded in the range of /USD in the past two weeks with a 30-day historical volatility touching a 2-year low of 3.4%. NBK resumed intervention in October (USD379.8mln), aimed at smoothing out significant movements. At present, tenge tends to remain stable for the rest of the year at the range of average, reflecting fundamental factors, namely the balance of supply and demand for USDKZT, movement in the currencies of major trading partners, oil prices, as well as the balance of payment. In the short-term, tenge might reflect market expectations on the Fed monetary policy. On 21 November, USDKZT settled at /USD, having strengthened by 0.8% from /USD on 7 November and rebounded from a one-year low of /USD on 5 October. At the same time, the ruble strengthened by 0.1% to 59.35/USD, while Brent crude traded at USD62.4pb, down by 2.0%. Oil prices continue to have a limited impact on USDKZT, as evidenced by negative 60-day historical correlation in the last two weeks. Meanwhile, a negative correlation between USDKZT and DXY Index (-0.36) implies an increasing impact of the US Federal Reserve policy expectations on tenge. NBK resumed intervention in October (USD379.8mln). The regulator intervenes in the FX market when there is a sudden move of more than 1 tenge vs. the US dollar on small trading volumes of nearly USD10mln in order to limit the volatility of FX trends. FX market 21-Nov-17 7-Nov Aug-17 USDKZT RUBKZT USDRUB EURKZT EURUSD DXY Index NDF USDKZT 3M, % USDKZT 30D historical volatility Money Market 21-Nov-17 7-Nov Aug-17 TONIA, % TONIA volume, KZT bln TWINA, % TWINA volume, KZT bln SWAP 1D, % SWAP 1D volume, USD mln SWAP 2D, % n/a 9.3 n/a SWAP 2D volume, USD mln n/a n/a MM Index, % Base rate, % KASE indices 21-Nov-17 7-Nov Aug-17 KASE Index 2,092 2,064 1,962 KASE BY, % NBK open position 21-Nov-17 7-Nov Aug-17 Standing facility, KZT bln Open market operations, KZT bln -2,936-3,065-2,881 Other operations, KZT bln 1,430 1,426 1,558 NBK's net position, KZT bln -1,910-1,825-1,522 Correspondent accounts Commodities 21-Nov-17 7-Nov Aug-17 Uranium, USD/lb Brent crude, USD/pb Brent MMOLG Net, mln bbl Credit&Deposit rates Aug-17 Jul-17 Jun-17 Corporate KZT loans rate, % Retail KZT loans rate, % Corporate FX loans rate, % Retail FX loans rate, % Corporate KZT deposits rate, % Retail KZT deposits rate, % Corporate FX deposits rate, % Retail FX deposits rate, % Source: Bloomberg, KASE, NBK, Samruk-Kazyna 1

2 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct Money market On 21 November, USDKZT settled at /USD, having strengthened by 0.8% from /USD on 7 November, with a 30-day historical volatility in USDKZT easing to a two-year low of 3.44% on 21 November. At the same time, the ruble strengthened by 0.1% to 59.35/USD, while Brent crude was at USD62.4pb, having declined by 2.0%. We expect oil prices at USD53-54pb average for 2017, based on our in-house projections. USDKZT vs. Brent price USDKZT vs. USDRUB (Jun 2017 Nov 2017) (Jun 2017 Nov 2017) Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov USDKZT (LHS) Brent price, USDpb (RHS, inverted) Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov USDKZT (LHS) USDRUB (RHS) 55 Source: Bloomberg, NBK, Samruk-Kazyna To recap, tenge strengthened in October, retreating from a one-year low of on 5 October, underpinned by NBK s statement on a potential conversion of FX currency from the National Fund in the amount of approximately USD1bln before year-end, as well as NBK s intervention in amount of USD379.8mln, the highest net sale of FX currency by NBK since January The regulator intervenes in the market when there is a sudden move of more than 1 tenge vs. the US dollar on small trading volumes of nearly USD10mln in order to limit the volatility of FX movement. NBK s intervention in the FX market (Jan 2016 Oct 2017) 1, "+" - net purchase of FX currency; "-" - net sale, USD mln Source: NBK, Samruk-Kazyna 2

3 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 We expect tenge to remain stable, reflecting fundamental factors, namely the balance of supply and demand for USDKZT, movement in the currencies of major trading partners, oil prices, as well as the balance of payment. Having said this, current account deficit improved in 9M17, having increased by 16.4% YoY to -USD5.04bln (9M16: -USD6.03bln), mainly supported by increased exports. In addition, supply of FX currency from exporters on the back of a period of tax payments by year-end is expected to support the tenge. At the same time, there is still a risk of elevated volatility in tenge, attributable to the narrow" FX market with limited number of market participants. On 27 November, NBK will decide on the base rate, which is a key monetary policy instrument that affects the medium-term inflation rate via the money market interest rates as well as FX rate. At present, conditions remained at a neutral stance, while further reduction in the base rate will depend on both the level of inflation and inflationary expectations, as well as the situation on the international market. In October, inflation stood at 7.7%, up from 7.1% in September, however still in line with the target inflation range of 6-8%. Although inflationary expectations were higher in October (6.9%), it remained well-anchored. The base rate, % (Sep 2015 Sep 2017) Source: NBK, Samruk-Kazyna On the Russian ruble front, RUBKZT settled at 5.56, having increased by 2.3% YTD from 5.43, suppressed by elevated imports by Russia to Kazakhstan, up by 22% YoY in 9M Trade balance between Kazakhstan and Russia vs. RUBKZT (Jan 2016 Sep 2017) 0 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Trade balance, USD mln (LHS) Source: Statistics committee, NBK, Samruk-Kazyna RUBKZT (RHS)

4 Oil prices continue to have a limited impact on USDKZT, as evidenced by negative 60-day historical correlation in the last two weeks. Meanwhile, a negative correlation between USDKZT and DXY Index of implies an increasing impact of the US Federal Reserve policy expectations on tenge. 60-day historical correlation of daily changes in USDKZT and USDRUB vs. DXY Index (Aug 2017 Nov 2017) Aug 1 Sep 1 Oct 1 Nov USDKZT USDRUB 60-day historical correlation of daily changes in USDKZT and USDRUB vs. Brent crude (Aug 2017 Nov 2017) Aug 1 Sep 1 Oct 1 Nov USDKZT USDRUB Source: Bloomberg, NBK, Samruk-Kazyna On the global market front, DXY Index slid by 0.9% in the last two weeks, while the market remains cautious, as the Fed minutes on Wednesday should reveal a guide on the US monetary policy. On the regional front, USDRUB stood at 59.35/USD, having strengthened by 0.1% in the past two weeks, underpinned by oil prices seesawing above USD60pb, as well as tax-payments by exporters at end-november. The Turkish lira hit a record low at 3.96 per dollar on Tuesday, having slipped by 1.8%, overwhelmed by tensions with the US and the market concerns over the central bank s efforts to curb an inflation spike. At the same time, USDKZT strengthened by 0.9% to FX rates (Nov 2016 Nov 2017) Per 1 US dollar 21-Nov-17 2W 1M 6M 1Y Kazakh tenge % 1.5% -6.0% 2.7% Russia ruble % -0.9% -4.1% 9.2% Chinese renminbi % -0.5% 3.6% 4.3% Euro % -2.1% 4.6% 10.7% British pound % 2.6% 2.4% 6.2% Swiss franc % -3.6% -1.9% 2.2% Czech koruna % 0.1% 8.3% 17.2% Turkish lira % -12.8% -9.8% -12.8% Australian dollar % -4.8% 1.6% 1.8% Canadian dollar % -2.3% 5.3% 5.6% Japanese yen % -2.4% -0.5% 0.7% Mexican peso % -5.7% -2.2% 9.1% Brazilian real % -3.0% 0.4% 4.7% South African rand % -7.7% -8.1% 0.3% DXY Index % 2.0% -3.3% -7.3% Source: Bloomberg, Samruk-Kazyna 4

5 In the past two weeks, the yield on Kazakhstan s sovereign international bond maturing in 2045 and coupon rate of 6.5% eased by 3.0bps, while Russian government bonds (OFZ) maturing in 2027 experienced an increase of 4bps. At the same time, Kazakhstan s 5-year CDS slid to bps on 21 November, down by 9.5bps, which could be attributable to relatively stable USDKZT trend but limited by the weak banking sector. YTM of sovereign bonds, % (Nov 2016 Nov 2017) Sovereign bond yields 21-Nov-17 2W, bps 1M, bps 6M, bps 1Y, bps USD Kazakhstan 6.5% ' EUR Germany 0.5% ' RUB Russia 8.15% ' EUR France 0.75% ' CNY China 3.59% ' EUR Italy 2.05% ' EUR Netherlands 0.75% ' GBP UK 4.25% ' TRY Turkey 10.5% ' CZK Czech 2.5% ' USD US 2.375% ' n/a Source: Bloomberg, Samruk-Kazyna The previously inverted risk-free yield curve saw a decline in yields, trending towards normalization. The riskfree yield curve, constructed by NBK and based on operations with NBK s short-term notes and Finance Ministry s debt securities on the domestic financial markets, serves as a benchmark of the cost of borrowing in tenge. The risk-free yield curve (Dec 2016 Nov 2017) Source: NBK 5

6 Disclaimer & Disclosures The Research and Knowledge Management Department Strategy and Portfolio Investment Block of JSC Samruk-Kazyna (hereinafter referred to as the Research Team ) is responsible for the analysis of this report. The Research Team certifies that all views expressed in this Research report (hereinafter referred to as Report ) reflect the Research Team s personal views. The Report is based on the information taken from the sources which the Research Team considers reliable and takes every care and precaution to ensure that information related to the Report published on the corporate website of JSC Samruk-Kazyna is accurate and regularly updated, but neither the Research Team nor JSC Samruk-Kazyna make no guarantee, warranty of any kind, express or implied, or make no representation as to the accuracy or completeness of the information contained in the Report or otherwise, and it should not be relied on as such. The Research Team may change the information contained in this Research at any time without notice. Neither the Research Team nor JSC Samruk-Kazyna or any of its officers, employees shall be liable for any losses or damage that may result from use of the information contained in the Report as a consequence of any inaccuracies in, errors or omissions, if any, from the information which the Report may contain or otherwise arising from the use and/or further communication, disclosure, or other publication of the information contained in the Report. This Report is solely intended for general informational purposes and is provided for internal distribution within JSC Samruk-Kazyna. This Report is not in any sense a solicitation or offer of the purchase or sale of securities or any assets in any jurisdiction. No part of this material may be copied or duplicated in any form by any means or redistributed without any prior written consent of JSC Samruk-Kazyna. Additional information is available upon request. 6

Kazakhstan s CDS and bond yields on the rise

RESEARCH AND KNOWLEDGE MANAGEMENT 22 September 2017 Kazakhstan s CDS and bond yields on the rise Tenge has weakened by 1.5% in the past two weeks to 340.4/USD on 21 September. NBK expects tenge to remain