Prospects for Ukrainian currency by end of turbulent year

In early autumn, the hryvnia is weakening against the dollar. However, experts say, there is no cause for concern. The outlook is still favorable, but the second wave of coronavirus remains a potential risk.

The Ukrainian currency has held out quite steadily in recent months in the face of an acute coronacrisis, but in late summer – early autumn it has somewhat lost ground against the dollar: at the official rate, the hryvnia started yielding a few kopiykas every day, having weakened from August 27 to date by 45 kopiykas, to UAH 27.83 per dollar.

Any fluctuations always cause increased interest among Ukrainians in the factors that lead to them. And while no major turmoil on the foreign exchange market is foreseen at the moment, a second coronavirus wave remains a potential risk.

Seasonal hryvnia fluctuations

According to financiers, the trend of recent days is nothing critical, being associated with the revival of business activity, which is traditional for the beginning of autumn. At this time, the demand for the dollar grows every year due to the increased activity of importers, while lower supplies of the U.S. currency is also observed on the forex market. In this regard, experts predict hryvnia weakening to the ceiling of UAH 28.00-28.20 per dollar, which is normal for the current economic situation.

REUTERS

Executive Director of the Independent Association of Banks of Ukraine (IABU) Olena Korobkova in her comment to UNIAN said that, despite the restoration of imports and trade deficits, Ukraine still maintains a positive current account balance of payments. At the same time, the expert adds, the bulk of the 2020 payments on public debt has already been made.

"Thus, there are no fundamental reasons for the imbalance between supply and demand on the foreign exchange market. This is actually manifested in the current dynamics of the foreign exchange market: despite some seasonal weakening, the hryvnia-dollar quotes are close to those values ​​that were observed at the end of July (UAH 27.7-27.9)," said Korobkova.

Floating exchange rate

This week, the National Bank of Ukraine presented the Basic Principles of the NBU's monetary policy for 2021 and the mid-term, which confirmed commitment to continuing the flexible exchange rate regime. Thus, the hryvnia exchange rate will continue to depend on the balance of supply and demand on the national foreign exchange market.

According to chief of the NBU Council, Bohdan Danylyshyn, the regulator will not oppose the fundamental trends in the exchange rate, and – as an additional monetary instrument – will be able to use foreign exchange interventions to fulfill tasks such as accumulating international reserves, smoothing the foreign exchange market, as well as minimizing the possible negative impact of changes in the exchange rate for the price competitiveness of the Ukrainian economy.

REUTERS

"The effectiveness of compliance with the strategy of forex interventions is confirmed in practice, and the National Bank has wonderfully demonstrated this in its ongoing efforts," Danylyshyn stressed.

NBU's conservative policy

Now the country's central bank reacts with restraint to a slight hryvnia devaluation. According to the analyst with Univer Investment Group, Mykhailo Fedorov, potentially the hryvnia could now be costing more, and the rate could stand at about UAH 26 per dollar.

"But this didn't happen because, figuratively speaking, the train goes one way. The situation has recently developed on the marker where the NBU buys foreign currency from the market at the moments when the hryvnia shows strength and beefs up, and thus it 'smoothes' hryvnia strengthening. But on the other hand, when the hryvnia weakens, the NBU is not too willing to part with the currency and doesn't 'smooth out' its weakening," the expert told UNIAN.

According to Fedorov, in August, the NBU bought foreign currency worth $460 million, but at the same time, there were no interventions to sell foreign currency, and pretty much the same thing happened in early September, but thanks to this, the NBU's gold and foreign exchange reserves are on the rise.

REUTERS

Since year-start , they have increased by $4.5 billion, and before Ukraine paid off $2 billion on external debts in early September, they exceeded $29 billion.

"The authorities of the country, of course, didn't announce their rejection of the free floating exchange rate, but by their moves they actually put the rate into a tight grip. And, probably, this situation will pursue until the end of the year," the analyst said.

Government's optimism

In general, no particular shockers are expected for the Ukrainian currency exchange rate at the moment. The lack of reasons to be anxious about possible hryvnia weakening is complemented by the optimism of the authorities.

In the latest update of the macroeconomic forecast by the Ministry of Economy as of the end of July, the average annual hryvnia exchange rate for 2020 is set at UAH 27.00 per dollar against the expected rate of UAH 29.5 at the peak of the coronacrisis in March.

Prime Minister of Ukraine Denys Shmyhal has repeatedly stated that there are no reasons for a sharp change in the rate in one way or the other.

"From the point of view of economic stability, budget, and exchange rate, we're alright ... The exchange rate will be stable, it will fluctuate within the range of UAH 27-28 [to the dollar]. We see no reason today for a sharp change in the exchange rate one way or the other," he said.

REUTERS

According to Shmyhal, at the moment Ukraine has a good situation with gold and foreign exchange reserves, banks' liquidity, and stability of the treasury account. The hryvnia exchange rate should also be positively affected by the receipt of the next tranche from the International Monetary Fund, which is expected in the near future. Finance Minister Sergei Marchenko announced that an online IMF mission review would soon be held, after which Ukraine, that has been diligently fulfilling all "structural beacons", should receive two more tranches of $700 million each before year-end. Such a positive signal for the Ukrainian economy will imply stability, including currency stability.

As for the 2021 Budget, whose draft is now being actively developed by the Ministry of Finance, the hryvnia exchange rate is set at about UAH 29 per dollar: without significant deviations from the current one, but with a slight insurance cushion.

Coronavirus threat

The only real risk at the moment both for the exchange rate and for the national economy as a whole is the second wave of coronavirus in Ukraine, which threatens to roll severe quarantine restrictions back and, as a result, deepen the crisis and increase demand for the dollar.

At the onset of the coronacrisis in March, the national currency weakened by four hryvnias, and the National Bank had to sell more than two billion dollars on the foreign exchange market to smooth out exchange rate fluctuations.  

As can be seen from forecasts and expectations, the Ukrainian currency demonstrated relative firmness during the crisis, and despite the seasonal devaluation, no storm is expected in the near future. That is, there is no need for citizens to rush to exchange booths.

If this fall the second wave of coronavirus doesn't lead to Ukraine reinstating strict quarantine measures, and the economy continues its gradual recovery, the forecast will be favorable both for the hryvnia exchange rate and for the welfare of Ukrainians.

Kateryna Zhyriy

UNIAN in Google News