Reuters/London

Ukraine’s hryvnia jumped from recent record lows yesterday after a 300-basis-point (bps) interest rate rise but ratcheting tensions with neighbouring Russia kept up pressure on regional as well as broader emerging markets.

Russia declared Ukraine on the brink of civil war as Kiev said an “anti-terrorist operation” against pro-Moscow separatists was under way, though the crackdown appeared to get off to a slow start. Fears of all-out war, a worsening domestic economy and reduced central bank intervention have seen the hryvnia lose a third of its value versus the dollar this year. With inflation expected to surge to 12% this year, the central bank raised rates for the first time in eight months on Monday to 9.5%.

The hryvnia surged more than 4% to trade at about 12 to the dollar while one-month and six-month forwards priced in less hryvnia depreciation than they did at the end of last week.

“We are seeing a bit of a short-term bounce in hryvnia on account of the rate rise,” Neil Shearing, head of emerging markets research at Capital Economics in London, said.

“Our forecast is for the hryvnia to end the year at 13 to the dollar so it may weaken a bit further which is needed to put the balance of payments on a more sustainable footing.”

Ukraine’s current account gas remains problematic even though it has narrowed from year-ago levels and Shearing said politics may exacerbate economic recession and hryvnia weakness. “Unless the political crisis eases, market conditions will remain fragile and the (central bank) could yet be forced into further defensive rate hikes,” he said. Ukrainian five-year debt insurance costs rose 14 basis points to 1,102 bps, according to Markit, a 3-week high.

In Russia, stocks hit new three-week lows, extending the previous session’s 1.3% fall though the rouble was flat against the dollar and dollar bonds steadied. Russian stocks had opened flat but soon resumed their descent.

Other emerging markets also weakened, hurt not onlyh by the geo-political tensions but by upbeat US retail data that boosted the dollar and US yields. Emerging equities fell half a% and have now fallen 1.5% from the 3-1/2 month highs hit last week. Equity markets were also hit by weakness in China where banking stocks tanked more than 2% after weak money supply data.

Central European markets were broadly negative, with the forint losing almost 0.2% against the euro and Hungarian stocks falling 0.6%, led by shares in Ukraine-exposed OTP Bank.

The Turkish lira fell half a% on Ukraine tensions and on last Friday’s ratings outlook cut from Moody’s.

The currency was also hit by speculation of renewed tensions between the central bank and the government, with the latter irked by interest rate rises that helped boost the lira to 3-1/2 month highs recently.

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