Holidays for hryvnia: Prospects for Ukrainian currency rate this summer
The Ukrainian currency has recently shown an upward trend after sliding in April amid Russia's military escalation. So should Ukrainians worry about the hryvnia exchange rate in the coming period of summer holidays?
The Ukrainian currency in the last weeks of spring pleased citizens with stability.
After a temporary weakening in April, when the hryvnia crossed the UAH 28/ USD mark, the situation improved, and throughout May the national currency strengthened by 50 kopiykas. On the last day of spring, the National Bank set the official rate at UAH 27.50 per dollar.
April's weakening of the Ukrainian currency was associated with the escalation of military conflict in the east of the country, when Putin's Russia started pulling troops to the Ukrainian border.
Under such conditions, non-resident investors who had previously been actively buying domestic government loan bonds expectedly reduced demand for Ukrainian securities.
National Bank Governor Kyrylo Shevchenko also noted an increase in demand for foreign currency in the Ukrainian market on the part of non-residents due to the rising geopolitical tensions.
"Before the amassing of Russian troops, investors and non-residents had been actively buying government bonds, even despite the delay in the IMF program review. Following the news of the escalation, we felt additional demand from non-residents to buy foreign currency. The NBU, accordingly, went in with interventions, and thanks to the actions by the National Bank, we managed to smooth this demand out," the top banker said.
Following the news about the withdrawal of part of the Russian troops from Ukrainian borders, the situation on the national currency market stabilized, and the hryvnia exchange rate gradually went up.
Experts with the ICU Financial Group favorably assess hryvnia's position on the foreign exchange market and predict its strengthening in the first half of the year to UAH 27 / USD and the rate of UAH 27.5-28 to the dollar by year-end.
Analysts point out that high real rates, rapid recovery of the national economy, and favorable external conditions are supporting the hryvnia rate.
Favorable terms of trade with foreign counterparts and the restriction of international tourism, as it objectively hinders the purchase of foreign currency by Ukrainian citizens, as well as the restoration of the inflow of portfolio investments, continue to positively influence the external balance of Ukraine.
This helps expand the NBU's international reserves, which reached $29 billion by the end of 2020, the highest level over the last eight years.
The main risks, experts say, are currently associated with a slowdown in reform and uncertainty in relations with the key creditor – the International Monetary Fund.
Some Ukrainians in the coming months will go on vacation abroad and be interested in buying foreign currency.
Also, large part of Ukrainians will spend the summer in their native country and, perhaps, some will be forced to sell dollar savings in order to pay for a well-deserved holiday or a long-delayed home refurbishments.
Both categories are interested in the behavior of the Ukrainian currency during the holidays, wondering whether it's set to strengthen or fall.
According to RoboForex analyst Andriy Hoilov, summer is the most favorable period for the national currency of Ukraine on the interbank market.
"Following the decision of the Russian Federation to withdraw troops from the border with Ukraine, the hryvnia began to regain ground. First of all, non-residents stopped selling government bonds on the secondary market. However, they are in no hurry to actively increase their portfolios in these securities. Over the past week, their investments grew only by UAH 280 million, to UAH 97.53 billion," Hoilov said.
The analyst notes that the state regulator has not entered the interbank market with interventions for more than two months already, and expects the NBU to appear at the auction only in the event of a rapid beef-up of the hryvnia.
There will be no large payments on Ukraine's external debts, which would lead to a reduction in the country's foreign exchange reserves, until September, so the regulator will remain relatively calm.
“Considering the current dynamics of global prices for Ukrainian exports, I suppose an increase in the supply of foreign currencies from steelmakers and farmers. This will have a positive effect on the hryvnia exchange rate and allow the NBU to replenish foreign exchange reserves. Demand from importers will remain at the current level," Hoilov emphasized.
The expert predicts that, in case no new political risks arise, the hryvnia exchange rate against the dollar and the euro will remain in narrow ranges throughout the summer.
"The hryvnia against the U.S. dollar will probably not go beyond the boundaries of the UAH 27.50-27.95 / USD channel. The single European currency, I believe, will be in the corridor of UAH 33.50-33.85 / EUR," Hoilov said.
Serhiy Saroyan, Head of Performance Management, also believes that no dramatic changes in the foreign exchange market are expected in the summer.
"Until the end of summer, the situation on the foreign exchange market shouldn't change. Now investors expect continued ultra-low rates in the United States and tightening of monetary policy in developing economies, resulting in a flow of capital into risky instruments. This dynamics will contribute to the weakness of the dollar and support the rate of local currencies like the hryvnia," Saroyan said.
The expert notes that there are no serious grounds for hryvnia strengthening besides the inflow of foreign capital into government bonds, but no tangible fall is worth expecting either, since the Ukrainian economy is gradually recovering from crisis and there are no negative sentiments.
"We expect the rate to move in the range of UAH 27.50-28.00 / USD. It should be borne in mind that this year UAH 585.13 billion must be paid on the state debt. Moreover, the peak of payments will be in September: 20.37 billion of domestic debt and 81.4 billion of external debt. This means that the NBU has no motivation to strongly support the rate. In other words, in order to save money, it is better to choose a strong currency, for example, the depreciated dollar," Saroyan recommends.
External factors and prospects of overcoming coronacrisis
According to experts, the situation in the planet's largest economy, the United States, will remain the main driver of the global financial market. There, large-scale fiscal incentives have begun to bear fruit: in the first quarter, the country's GDP grew by 6.4%.
If the American economy develops at such a pace, it will soon be able to return to the pre-coronacrisis level.
"As the economy recovers, Federal Reserve System officials will increasingly speak out about the need to change monetary policy and fight inflation. This should be accompanied by growing nervousness in the markets and an influx of money into defensive instruments, mainly the dollar. Thus, at the current levels, the American currency looks quite attractive for those who are going to keep buying it for a long time," Saroyan said.
Ukrainian financiers agree that the summer should be calm for the hryvnia: in the absence of force majeure, no significant fluctuations are expected on the foreign exchange market.
We also see that the situation with the coronavirus pandemic has somewhat stabilized in the country: the incidence rate has declined, while the vaccination campaign goes on, albeit at a modest pace.
The national economy starts to revive, businesses are adjusting to new conditions, and export-oriented industries continue to perform pro-actively.
The spring filled with rains gives hope for a rich harvest in 2021, which means that the exports of Ukrainian agricultural products will increase and, together with high global food prices, will provide Ukraine with additional forex earnings.
Therefore, Ukrainians can make plans for the summer and enjoy a long-awaited vacation with a stable hryvnia exchange rate, not forgetting about observing health safety measures, of course.