Tightening of financial conditions in May on the global market continued, the US Fed raised its rate by half a percentage point, global investors expect a similar step from the ECB. Along with that, volatility and uncertainty on the global commodity and currency markets persist due to geopolitical risks. NBK Deputy Governor Aliya Moldabekova commented how this has affected dynamics of the tenge and what are the key factors behind the dynamics of the international reserves

– What events had dominant influence on financial markets in May?

– Financial conditions continued to tighten in May. In April, we saw warning signals from the US Fed about the need for a more aggressive rate hike. As a result, in May, an important but at the same time quite expected event was a decision to increase the rate by 50 basis points up to 0.75–1%. Ahead of concerns raising, the US Fed Chairman Jerome Powell made a statement that a rather rapid pace of rate hike by 75 basis points was not actively considered. Following the US Fed, the ECB is actively discussing a possibility of early tightening of financial conditions in July 2022. Governor of the Central Bank of the Eurozone has signaled that she considers it appropriate to adjust the level of interest rates.

Even though global investor sentiment was less negative in May compared to the previous month, volatility remained at historically high levels: the VIX volatility indicator exceeded 36 points. Dynamics of the stock market in May was mixed: early month saw a noticeable drop, which was later adjusted amid the reports of a gradual lifting of quarantine restrictions in China. At the end of the month, the global stock index MSCI World fell by 0.2%.

In these conditions, the USD index DXY also in early May rose to twenty-year highs – 104.9 points, then moved back ending the month with slight weakening of 1.2%.

Global business activity demonstrated resilience last month, adding 0.3 points for the month to 51.5 as China's decline slowed down and the situation in Brazil, Mexico and Canada improved.

On the oil market, price growth due to ongoing geopolitical tensions reached 12.4% for the month. At the same time, fears about quarantine in China fell by the wayside after the EU reached an agreement to introduce a partial ban on export of the Russian oil transported by pipeline.

On June 2, OPEC+ announced an accelerated curtailment of production restrictions, increasing the quota for July-August by 648 thousand barrels per day instead of 430 thousand barrels. However, oil prices reacted with growth, settling at around USD120 per barrel due to the doubts of the ability of some countries to rapidly build up volumes.

– Despite volatility on external markets, the situation on the domestic foreign exchange market was favorable in May. What was the reason for this?

– Indeed, in May the tenge continued its appreciation reaching 415.16 KZT per USD. For the month, the exchange rate gained 6.8% against the background of high oil prices, increased foreign exchange earnings, improving the EM currencies, including the Russian ruble, a major tax period and a general decline in household demand for foreign currency.

Supply on the foreign exchange market was also supported by sale of foreign exchange earnings by the entities of the quasi-public sector, while their sales in May made almost USD 598 million.

Against the background of a period of large tax payments to the budget and a corresponding need to sell foreign currency, supply of the foreign currency considerably exceeded the demand. In order to maintain liquidity and offset the existing imbalance between supply and demand of foreign currency during the tax week, the National Bank purchased an excess supply of foreign currency for an amount of USD 110.5 million. It should be indicated that the volume of interventions was around 4.6% of the total market, while the participation of the National Bank was neutral and did not affect the exchange rate.

In order to allocate transfers from the National Fund to the republican budget, USD 4 million were sold at the beginning of the month. Subsequently, no sales of foreign exchange resources of the National Fund were required, given that transfers were provided at the expense of receipts to the National Fund.

With a view to maintain the share of pension assets in foreign currency at a level of at least 30%, which ensures diversification of the investment portfolio, USD 74.5 million were purchased for UAPF pension assets in May on the foreign exchange market.

– During May, we witnessed noticeable appreciation of the ruble against the USD, which raises two questions at once. First, why tenge improvement was more moderate compared to the ruble? Second, a lot of analysts argue that appreciation of the ruble is of ‘artificial’ and temporary nature. Does the National Bank plan a mirror weakening of the tenge if the ruble loses its value in the near future?

– Indeed, during the last decade of May, the exchange rate of the ruble reached its lowest level since February 2018. Measures of capital control taken by the Russian Federation played a significant role in rapid appreciation of the ruble. In particular, mandatory sale by exporters of a part of their foreign exchange earnings, a ban on withdrawal of capital from the country, and others.

Greater appreciation of the ruble compared to the tenge caused a change in the mutual quotation from 5–5.5 to 7 tenge per ruble. It is worth noting that such a shift in parity was not attributed to fundamental changes in mutual trade or structures of the economies of the Russian Federation and Kazakhstan. Answering the first question, the tenge did not appreciate as much as the ruble, because ruble's appreciation is connected with very specific factors that do not have a direct impact on our national currency.

With regard to further situation with the ruble and tenge exchange rate, it should be noted that the National Bank does not set itself the goal of interfering in the market exchange rate of the tenge. Therefore, any manipulations regarding the exchange rate of the national currency in order to influence the parity with the ruble or any other currency shall not be possible. Our goal is to prevent destabilization on the domestic financial market and smooth out excessive volatility, but by no means targeting a certain level of the exchange rate.

– Ms. Moldabekova, what was the dynamics of gold and foreign exchange reserves during May?

– In May, gold and foreign exchange reserves decreased, at the end of the month its volume totaled USD 32.8 billion.

To a large extent, contraction of the gold and foreign exchange reserves resulted from a falling gold price from USD 1,915 to USD 1,854 per ounce. The minimum value of price during the month was USD 1,806 per ounce, while during the day the quotes fell below the psychological mark of USD 1,800. Just like the last month, price for the precious metal is under pressure from higher yields of the US Treasury bonds, which is associated with market expectations for further tightening of monetary policy by the US Fed. However, the existing inflationary risks and ongoing geopolitical tensions continue to contribute to support of prices for precious metal.

Apart from a falling value of the gold portfolio, correspondent accounts of second-tier banks with the National Bank diminished, as well as payment of public debt. On the other hand, purchases of foreign currency on the local foreign exchange market partially restored the currency part of the gold and foreign exchange reserves.

– How did volume of foreign exchange assets of the National Fund change in May, and what factors influenced this?

– According to the preliminary data, in May, the volume of foreign exchange assets of the National Fund amounted to USD 53.8 billion, having expanded by USD 1.3 billion for the past month.

Last month, the National Fund allocated 370 billion KZT to the republican budget as transfers from the account balances in tenge and also the KZT receipts to the Fund. Due to high oil prices and the tax week, the Fund received USD 1.15 billion in foreign exchange earnings in May.

Investment income of the National Fund based on the results of the past month was positive and stood at USD 142 million. Against the background of the challenging geopolitical situation in the world, tightening of the monetary policy of the US Fed, as well as USD appreciation, investment income of the National Fund has remained negative since the beginning of this year. Along with that, long-term profitability of the National Fund since the beginning of its creation in annual terms is 3.24%, and for the past 5 years it is 2.30%.

– What are your expectations for a future situation on financial markets?

– Growth pace of the global economy is being revised, recently the World Bank lowered its forecast for global GDP growth for 2022 from 4.1% in January to 2.9%. The key reasons behind the slowdown in the economic growth are the lingering Covid-19 pandemic and the global geopolitical situation, which has led to rising commodity prices, increased risks of supply disruptions and aggravated pro-inflationary pressures, which, in turn, entails tougher monetary policy by central banks.

Moreover, against the background of doubts about viability of the US economy amid rapidly tightening monetary conditions, some analysts believe that exclusivity of the USD on the foreign exchange market is likely to lose momentum. According to the estimates by Reuters, the USD index weakens by an average of 1.4% from the first to the last rate hike. The Goldman Sachs’ analysts highlighted that in previous periods, weakening of the dollar index after having reached the maximum values ​​was accompanied by favorable dynamics of currencies and assets of emerging markets during six months. On the other hand, the ongoing geopolitical tensions in the world can make their own adjustments.

As for the oil market, some economists believe that the increase in production quotas remains insufficient to ensure market sustainability, given the recovering demand in China. Analysts at Goldman Sachs expect oil to hit USD 125 per barrel in H2 2022. J.P. Morgan forecasts a peak in oil prices in June on the average making USD 122 per barrel. At the same time, a partial EU ban on export of the Russian oil may curtail oil production in the Russian Federation, and its recovery will depend on a speed of changes in the logistics of supplies and redirection of raw materials to other countries.

Overall, it is important to note that external factors are still subject to volatility, however, persistence of high oil prices is supporting the exchange rate of the tenge. Today, the situation on the foreign exchange market has stabilized, the exchange rate of the tenge reflects the balance of supply and demand. Commitment to free floating and flexible exchange rate allowed to absorb external shocks, prevent accumulation of imbalances and ensure integrity of reserves. The exchange rate of the tenge will continue to be formed under influence of the fundamental factors, meanwhile the range of its fluctuations will depend on expectations of domestic participants and dynamics on global markets.

Source: Kapital.kz