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NBK: currency market in august was well-balanced

Why tenge appreciated in August despite volatility on external markets and declining oil prices, and what was the performance of international reserves, explained NBK Deputy Governor Aliya Moldabekova.

– What were the developments on global financial markets in August?

– Dynamics on foreign markets during the month was ambiguous and multidirectional. In early August, geopolitics factor became dominant for dynamics of financial markets in connection with a visit of the US  Speaker of the House of Representatives to Taiwan. Tensions between the US and China caused investors to flee from risky assets. This entailed improvement of the USD and rising gold prices.

However, release of data showing a decline in inflation rate in the US briefly supported the risk sentiment and gave hope for an early turn in the policy to tighten conditions of the US Fed. By the end of the month, Jerome Powell's speech disproved those hopes. The head of the Fed warned about risks that could lead to premature easing of the regulator's policy. As a result, rally in the USD exchange rate resumed with renewed vigor. DXY index hit a new 20-year high of 109.48 points on August 29, up 2.6% for the month. With dominance of the USD, fall of the euro below parity in August became the ‘new normal’.

Along with tough rhetoric of the US Fed, the Bank of England and the Central Bank of Australia revealed their commitment to raise rates. Regulators have increased rates by 50 bp. The ECB also announced its readiness for another significant rate increase at the next meeting.

Thus, against the background of risks of appreciation of monetary conditions, volatility returned to stock markets. After impressive gains in July, the MSCI World Index fell by 4.3% in August.

Oil quotes in August also fell by 12.3%. This drop was amid the signs of slowdown in global industrial production and risks of further rate hikes by leading central banks. Thus, industrial production in China slowed down to 3.8% y/y against the expected 4.3% and 3.9% reported the previous month. Business activity in the US fell to 45 points (S&P US PMI). The factor of pressure on oil quotes in the middle of the month was also an expectation of reaching an agreement on a nuclear deal between the US and Iran. However, as analysts say, this scenario is unlikely due to unresolved disagreements. According to Goldman Sachs calculations, return of the Iranian oil to the global market could reduce its price forecast for 2023 by USD 5-10 from the current forecast of USD 125.

In early September, oil quotes rose slightly to USD 95. This happened against the background of an unexpected decision by OPEC+ to cut the output by 100,000 barrels in October.

– Despite declining oil prices and negative external background, exchange rate of tenge grew stronger over the month. What is behind this improvement?

– Indeed, in August, tenge gained 1% of its value to 472.29 per US Dollar. Sales of foreign currency by exporters for quarterly tax payments contributed to a moderate enhancement of the KZT exchange rate. Thus, internal factors had a predominant impact on the foreign exchange market.

Entities in the quasi-public sector sold USD 469.5 million through second-tier banks. Against the background of market balance, the National Bank did not carry out foreign exchange interventions. The transfer from the National Fund to the budget was provided with tenge receipts, thus the sale of foreign exchange assets of the National Fund was not required.

– How did gold and foreign exchange assets change in August?

– According to the tentative data, volume of gold and foreign currency assets at the end of the month amounted to USD 32.7 billion. In August, we saw a slight decline in the gold and foreign currency assets by USD 131 million. This was connected with declining prices for the precious metal by 2.6% to USD 1,712.40 per troy ounce. Gold prices are still under pressure amid the expectations of further tightening of the Fed’s monetary policy.

It is remarkable that, to a large extent, the decrease in the gold portfolio was offset by a growth in the foreign exchange part of the gold and foreign currency assets due to an inflow of second-tier banks’ funds to foreign currency accounts with the National Bank.

– How did volume of foreign exchange assets of the National Fund change in August, and what factors affected it?

– According to preliminary data, in August, volume of foreign exchange assets of the National Fund made USD 53.8 billion, with an increase of USD 500 million.

Last month, 384 billion KZT were allocated from the National Fund to the republican budget as transfers. The main part of the transfers was allocated from tenge receipts to the fund in the amount of around 338 billion KZT, as well as from the balance on the tenge account of the National Fund. Thus, as mentioned earlier, last month the National Bank did not sell foreign exchange assets of the National Fund on the domestic foreign exchange market. Along with that, foreign exchange earnings to the fund in August amounted to USD 1.76 billion.

According to last month’s results, investment income of the National Fund was in the negative zone, (-) 1,251 million USD. I would highlight that the decline in the bond and stock market is due to a global outflow of capital into money market instruments. This happened against the background of the ongoing tightening of monetary policy by the world's leading central banks. Along with that, long-term profitability of the National Fund since its establishment in annual terms is 3.05%.

– What is expected to happen to oil? What are forecasts of analysts for the global currency market?

– Global currency market has expectations about likely further appreciation of the USD after a speech delivered by Fed’s Chair at the annual Jackson Hole Economic Symposium. The US regulator does not yet see the need to reduce the pace of rate hikes. This decision is likely to continue global appreciation of the USD and have a negative impact on emerging market currencies.

As for the oil market, there was divergence of opinions among the analysts. Some economists, in particular Goldman Sachs, expect that oil prices will continue to grow. In their opinion, cost of the ‘black gold’ will rise due to an increased demand after quarantine measures and use of oil as a replacement for rising gas prices.

Along with that, given current dynamics, analysts slightly adjusted their price forecast for the end of the year from USD 130 to USD 125 per barrel. The most pessimistic forecasts remain at USD 85 per barrel amid recession risks.

Source: Kapital.kz

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