The UZS: Yes, It’s All About Inflation Targeting

The UZS: Yes, It’s All About Inflation Targeting
 

• Despite gold prices easing from record-high levels and a stronger USD following the Middle East escalation, the UZS has demonstrated remarkable stability, outperforming peers;
   

• While external factors play a role, it is, ultimately, about inflation targeting and its credible implementation – the single most important driver for the UZS outlook, as we have argued over the past two years;
   

• Inflation has continued to moderate, falling below target for the first time in seasonally adjusted monthly terms in Sep-25, while expectations have become more firmly anchored;
   

• However, in April, the UZS yield curve – having appropriately inverted in 2026 – has steepened at the long end, which, in our view, runs counter to the broader trend and outlook, suggesting scope for further compression in yields;
   

• We argue that the curve should be more inverted at the front, lower at the belly, and significantly lower at the long end, as we expect the market to continue to tilt bullish – as it has over the past two years – pricing in structural changes in the macro regime;
   

• In practical terms, locking in the UZS long end remains attractive, as we continue to bet on lower inflation, lower rates and at least lower UZS depreciation going forward;
   

• Same holds for hedging costs, which are now much lower, though still expensive, in our view;
   

• Lower yields on the back of disinflation and an also lower depreciation risk premium, in turn, support higher corporate valuations.