The NBU introduced controlled exchange rate flexibility on the interbank market, but no changes to the rules occurred on the cash foreign exchange market. Focus examined what happened to the exchange rate during the first ten days of NBU Resolution No. 121 and whether it is worth preparing for a serious weakening of the hryvnia.
The National Bank of Ukraine, by Resolution No. 121 of October 2, approved the transition to a regime of managed exchange rate flexibility, which was done as part of the implementation of the Strategy for easing currency restrictions, transition to greater exchange rate flexibility and a return to inflation targeting. Now, during October 3-13, the NBU does not independently establish the official rate at which purchase and sale transactions take place on the interbank foreign exchange market, but determines the official rate as a result of transactions on the interbank market. Focus asked experts how trading in the foreign exchange market occurs during the first ten days of the flexible managed exchange rate and whether the consequences of the introduced innovations are expected for the cash exchange rate.
Supply and demand: what happened on the interbank market after the National Bank announced changes
The initial stage of the transition to a flexible managed exchange rate was quite turbulent, Anna Zolotko, director of the treasury operations department of Unex Bank, told Focus.
“The first day of trading under the new rules was very nervous. The volume of transactions for purchasing non-cash currency on deposit and online within the range of 50 thousand hryvnia has tripled. Importers also accelerated payments under contracts as much as possible. This led to a situational surge in trading volume on the Ukrainian foreign exchange market to more than $500 million. But the NBU, obviously, was prepared for such a situation, and the regulator did not even give reason to think that the rate could rise. Moreover, in contrast to market expectations, trading took place close to the official rate the day before, and not at the “official rate + 1%” mark, says the expert.
She explained: in the following days, the volume of trading, and then the NBU’s interventions, rapidly declined, and by the end of the first week of the managed exchange rate flexibility regime, it dropped to “calm” levels of about $150 million.
It is interesting that the devaluation of the hryvnia on the interbank market predicted by some experts after the transition to a flexible managed exchange rate did not happen. But the price of this containment of possible fluctuations was the active participation of the NBU - without an injection of currency into the market from the regulator, the exchange rate could well have moved towards devaluation. “Trading on the interbank market for the first time in a long time began to strengthen the national currency due to sales from the regulator. On the first day (of the action of the resolution on a flexible managed exchange rate - Focus) a large volume of foreign currency was sold to meet the needs of importers - about $500 million. The market opened at the levels of 36.60/36.80 UAH/USD, but due to the permanent presence NBU, as a seller, the market narrowed at quotes of 36.59/36.66 UAH/USD. And while every day the market opens with a slight strengthening, trading on October 12 took place at the levels of 36.39-36.43 UAH/USD,” Anton Kurinnoy, a dealer in the global markets department of OTP Bank, told Focus.
According to him, in early October, strong demand for currency was noticeable against the background of the new exchange rate policy, so the regulator was forced to sell $1.16 billion in the first week and another 100-200 million every day during week 9. October 13. “The regulator is constantly present on the market with the sale of currency, and was even seen buying currency when there was a little more supply,” says Kurinnoy.
There is currently no incredible demand for foreign currency from importers, say experts interviewed by Focus. This is partly due to the fact that a significant surge in demand occurred last week, when, as noted above, the National Bank had to sell $1.16 billion on the market. “As a result of this week, it looks like we will see a significant reduction in the rate of foreign currency sales from the National Bank - Trading is quite sluggish, and volumes are very modest compared to last week. But I still have to admit that devaluation expectations among Ukrainians are still quite high. The daily volume of purchases of non-cash currency by the population remains at the level of $25-30 million. This is 2-3 times lower than the “panic” volumes on October 2-3, when the figure reached $85 million, but still higher than the “calm” figures,” said Anna Zolotko .
Changeable dollar. What is happening in exchange offices and how the rate may change in the second half of October
Although the new managed flexible exchange rate regime has the potential to undermine the cash rate, so far there have been no sharp fluctuations in exchange offices.
“As with the beginning of the NBU’s introduction of the “managed flexibility” regime, the cash market will “look back” at the interbank exchange rate indicators, adding 1-1.5% “on top” to it. That is why we are inclined to believe that in the coming days (next week, in particular) the currency corridor will remain within the expected and previously predicted limits: 37.5-38.5 UAH/$ and 39-42 UAH/€,” says Taras Lesovoy, head of the treasury department of Globus Bank.
He explained that, most likely, next week, as in the previous one, fluctuations in exchange rates on the interbank market will be minimal, because the regulator is making efforts to ensure that the new stage of liberalization does not destroy what has already been achieved by carrying out powerful foreign exchange interventions from time to time. “Of course, a little later exchange rate changes will become more noticeable, but this will not happen suddenly, but will be spread out over time. In addition, one of the directions for further development of the market could be a gradual reduction in the difference between the interbank and retail rates to 1-1.5%,” noted Taras Lesovoy.
According to Anna Zolotko, while the market is adapting to new conditions, it is assessing how flexibly demand responds to changes in the exchange rate. This applies to all segments: both cash and non-cash.
The National Bank is making efforts to ensure that the new stage of liberalization does not destroy what has already been achieved, from time to time carrying out powerful foreign exchange interventions
“It would be quite logical to expect that as quotations on the ASU decline, the cost of dollars and euros through non-cash channels will begin to decline. So far these trends are extremely weak, but within a few weeks, provided that current trends in ASU continue, I expect increased competition among banks and a gradual decrease in the value of the non-cash dollar. Both when purchasing with a deposit and when purchasing online. If these forecasts come true, we should expect a more dynamic strengthening of the hryvnia in the cash segment,” notes Anna Zolotko.
However, despite hopes that the hryvnia will strengthen in the cash market, there is still a risk that this will not happen, and exchange rate fluctuations will go in the opposite direction - to the devaluation of the hryvnia closer to the level of 39-40 UAH per dollar.
“On the cash market, there were attempts, against the backdrop of news of a flexible exchange rate, to create panic and start strong growth, but the NBU did not allow the “rocket” to accelerate due to the strengthening of the hryvnia, the cash market remained at the levels of 38-38.30 UAH/USD, demonstrating stability, but the interbank market is not in a hurry to strengthen. Ultimately, the trajectory of fluctuations in October will depend on the actions of the regulator and the volume of demand. So far, the market does not fully understand the future behavior of the regulator,” Anton Kurinnoy noted in a comment to Focus.
Rise or fall: when the hryvnia can devalue below 40 UAH per dollar
Currently, four factors have the greatest influence on exchange rate fluctuations in Ukraine: 1) the war in Ukraine and the further successes of the Armed Forces of Ukraine at the front; 2) the policy of the NBU and the volume of sales of foreign currency by the National Bank to banks; 3) the volume of international financial assistance covering important items of the state budget; 4) Ukraine’s own economic policy and its export capabilities.
However, according to experts, in the future the hryvnia will still devalue to the level of 40 hryvnia per dollar and even further. Partially, these expectations were already laid down by the Ministry of Economy when forming the draft state budget for 2024 - there we are talking about the exchange rate of 41.4 UAH per dollar.
“Over a long period of time, the probability of reaching the level of 39-40 UAH/$ is quite high. The only question is whether this will happen in six months, or in a year or two. But now we see exactly the opposite picture: the hryvnia is strengthening on the interbank market. I don’t think that this trend will last too long and will be very deep, because too strong a hryvnia harms exporters and stimulates imports. A comfortable level for all market participants in the coming months would probably be 36.9-37 UAH/$. It would not affect the cash market in any way, and would be more comfortable for exporters,” says Anna Zolotko. In her opinion, exchange rate levels of 39-40 UAH/$ should not be expected this year.
In addition to the above factors influencing exchange rate fluctuations in Ukraine, experts note another one - military operations in Israel, which has been waging a fierce fight against Hamas terrorists since October 7. “If the war in Israel goes only with Hamas, then there will be no significant impact on exchange rate fluctuations in Ukraine; if the war unfolds according to a broader scenario, we can feel the impact through a revision of assistance to Ukraine, primarily from the United States, but most likely , the baton from the United States will be picked up here by EU countries that are interested in Ukraine’s victory,” commented Vitaly Shapran, economist, former member of the NBU Council.
If the level of financial assistance to Ukraine from the United States begins to decrease, then the hryvnia will most likely begin to devalue, experts say
And according to financial analyst Ivan Uglyanitsa, at this stage the war in Israel will not have an impact on the economic situation in Ukraine. However, an increase in demand for the dollar, as a rule, globally leads to an increase in demand for the dollar also in Ukraine. “That is, as part of the unfolding of this crisis, both economic, geopolitical, and social, the demand for risk-free assets will increase, first of all, by the dollar,” the expert explained. If this demand for the dollar really goes up, then a weakening of the hryvnia cannot be avoided
