New forecasts for the US Fed to raise rates and a surge in geopolitical risks have entailed volatility on global financial markets. Aliya Moldabekova, Deputy Governor of the National Bank of the Republic of Kazakhstan, commented on how this affected the tenge exchange rate and dynamics of international reserves.

– What external factors prevailed over the past month?

– In September, a drastic decline of risk sentiment and increased volatility of risky assets were caused by continued tightening of the monetary policy of the US Fed and other leading central banks in the world. Moreover, escalating  geopolitical crisis between Russia and Ukraine turned into a key factor.

Monthly inflation statistics in the US for August revealed that price growth exceeded analysts' expectations and made 8.3% against an 8.1% consensus. This factor reinforced opinions of global investors about further aggressive rate hikes by the US Fed.

Indeed, in the second half of the month, the US regulator decided to raise rates by 75 basis points for the third time in a row. Along with that, Jerome Powell warned about a need for a restrictive monetary policy stance for an extended period.

Yields on 10-year US Treasury bonds rose above 4% for the first time in a decade. This contributed to further global strengthening of the USD. Harsh rhetoric of the US Fed also had an impact. Thus, the DXY index rose by 3% for the month to 112.1 points, updating a 20-year high within a month.

Along with that, dominance of the USD exacerbated local vulnerabilities. In particular, the British pound plunged to a historic low, ending the month with a 4% abatement amid fears that the new fiscal policy will cause higher inflation and public debt. The Japanese yen lost 4.1% of its value due to maintenance of an ultra-soft monetary policy by the Central Bank. In order to prevent excessive fluctuations in national currencies, the Bank of Japan carried out foreign exchange interventions as foreign currency sales, while the Bank of England intervened the debt market purchasing U.K. government bonds.

Negative risk sentiment also triggered a sell-off on the stock market. The MSCI World Index is down 9.5%, its deepest drop since March 2020.

On the oil market in September, decline in quotations persisted, prices fell by 8.8% to USD 88 per barrel. Thus, the first quarterly drop in oil was recorded in more than two years. Concerns about a slowdown in global economic growth prevailed over prospects for a reduction in oil supply and production. In early October, quotes received support from an unexpected decision of the OPEC to cut oil production by 2 million barrels per day from November 2022.

– What was happening on the foreign exchange market during the month?

– In September, tenge depreciated by 0.9% to 476.53 KZT/ USD. Throughout the month, the national currency was under pressure from a number of unfavorable external factors. First of all, it is necessary to indicate escalation of geopolitical conflicts, which affected sentiment of market participants. Moreover, during September, tightening of monetary conditions worldwide continue alongside with downward movement of oil prices. 

Despite impact of negative factors, foreign exchange market was balanced, and the National Bank did not intervene the foreign exchange market. Exchange trading volume for the KZT/ USD pair slightly shrank compared to August.

The foreign exchange market was supported by sales of the quasi-public sector. Volume of proceeds sold on the foreign exchange market through second-tier banks totaled USD 583.5 million. Sales of foreign currency to ensure transfers from the National Fund to the Republican budget in September amounted to 85.1 million USD.

– Were there any changes in gold and foreign exchange assets?

– As tentative data show, volume of gold and foreign exchange assets at the end of the month was USD 32.8 billion, an increase of USD 90 million for the month. Main role among positive factors was played by an inflow of second-tier banks’ funds into accounts in foreign currency with the National Bank, and among negative ones, it was payment of the government debt and falling gold prices.

Gold prices were subject to high volatility during September. At the end of the month, the quotations fell from USD 1,712 per ounce to USD 1,673 per ounce, or 2.3% down. Despite the fact that in the last days of September, gold partially regained its positions, during the month the quotes fell to USD 1,618 per ounce, updating the two-year low since April 2020.

Declining price for the precious metal was also caused by ongoing tightening of monetary policy by central banks worldwide as well as global appreciation of the USD. The DXY index against a basket of major currencies hit a 20-year high in September.

– How did dynamics of external factors influence volume of assets of the National Fund?

– According to preliminary data, in September, volume of foreign exchange assets of the National Fund amounted to USD 51.6 billion.

Last month, 305 billion KZT were allocated from the National Fund to the Republican budget as transfers. Allocation of transfers was implemented mainly using a balance on the tenge account of the fund as well as, as previously noted, conversion of foreign currency in the amount of USD 85 million, or nearly 41 billion in KZT equivalent.

Against the background of the rhetoric of central banks of developed countries to tighten monetary policy, bond and stock markets continue to fall. As a result, yield of bond portfolio of developed countries in September was (-)4.02%, while stock portfolio made (-)9.26%. Along with that, long-term profitability of the National Fund from the beginning of its creation in annual terms is 2.81%.

– What are the prospects for development of the situation on financial markets in the near future?

– The past month has set new background for financial markets. Thus, the new Dot Plot of the US Fed displayed an increase in the forecast for the rate at the end of the year to 4.25–4.5% against the previous forecast of 3.25–3.5% (from the June plot). Thus, an increase in rates by another 1.25 percentage points is expected until the end of the current year. Given that the DXY index has strengthened almost every month, except for May this year, some analysts suggest that the global appreciation of the USD will continue as long as the US Fed pro-actively pursues its tight monetary policy.

Along with that, it should be noted that investors are concerned about intervention of the Bank of Japan and the Bank of England on the currency and debt markets. These central banks resort to unconventional monetary policy instruments. This points to signs of instability on financial markets. Therefore, further aggressive tightening of rates by the US Fed is a serious risk factor for all global markets, both for emerging markets and for countries with developed economies.

New conditions were also announced for the oil market in early October: an unexpected reduction in the oil production quota by 2 million barrels per day in November – December 2022. According to Goldman Sachs, actual reduction due to lagging production of some OPEC+ countries behind previously set quotas will be about 1.2 million barrels per day. Despite this, this agreement of the alliance is significant for the oil market. In this connection, some analysts expect quotes to rise above USD 100 per barrel in the coming quarters. However, expectations for deterioration in prospects for global economic growth remain factors of volatility on the ‘black gold’ market.