Currency Fluctuations: Why the Ukrainian Hryvnia Sometimes Weakens and Sometimes Strengthens
24 April 13:36
ANALYSIS FROM 
By the end of the week, the hryvnia had strengthened slightly against the dollar and the euro, as if the sharp decline recorded on Tuesday and Wednesday had never happened. "Komersant Ukrainian" investigated what is happening in the foreign exchange market.
The National Bank of Ukraine once again demonstrated its signature “managed flexibility.” The hryvnia’s devaluation at the start of the week—when the U.S. dollar was trading at 44.116 hryvnia and the euro at 51.9113—gave way to a strengthening in the second half of the week; the official exchange rate for the U.S. dollar on Friday was set at 43.9412 hryvnia, and for the euro at 51.3804 hryvnia. And these changes, of course, took place without any official explanations.
Unclear reasons
Experts did not notice anything particularly new in the market that could have triggered the hryvnia’s devaluation. They largely limited themselves to noting that the exchange rate fluctuations were insignificant and fit within the “managed flexibility” regime. There were also speculations that the NBU had seen something in its operational data—which is closed to the public—that compelled it to activate the aforementioned “flexible” regime. Among influential events, the spring meeting of the IMF and the World Bank in Washington was also mentioned. Perhaps Ukrainian officials were indeed reminded there of the advisability of devaluing the hryvnia to support the budget, and they reacted. And then they returned home, realized they had gone too far, and strengthened the hryvnia again. Seriously speaking, however, the main determining factor influencing the currency market as well is geopolitical instability. This is also the view of financial analyst Andriy Shevchyshyn.
“The main reason, in my opinion, lies in the problems in the Middle East. Because the Middle East is a traditional area of our presence for Ukraine.For the agricultural sector, for the metallurgical industry, for all others. Plus North Africa on top of that. That is, export volumes are starting to decline. And if you look at the NBU statistics currently available, you can see that the supply of currency on the market is quite weak. Specifically on the currency market,” the expert explains.
Supply is decreasing, while demand for currency is growing. For example, the Ukrainian fuel market is almost entirely dependent on imports, and currency is needed to purchase fuel.
However, economist Boris Kushniruk has a more down-to-earth explanation for exchange rate fluctuations like those seen this week. He highlights another Ukrainian peculiarity.
“If we look at the formal indicators, we have a massive trade deficit, where imports are twice as high as exports. Under such circumstances, there can be no market-driven exchange rate formation a priori. The main seller of currency is the National Bank. And the exchange rate is entirely determined by the National Bank. Under these circumstances, what they do in an unpredictable market is part of the story of corruption. And those who know what will happen to the exchange rate know what to do. They know when to sell currency, and they know when to buy it,” the expert notes.
At the same time, as financial analyst Andriy Shevchyshyn notes, the rise in the euro and dollar exchange rates did not affect the balance of the cash market. In other words, the public did not engage in speculative buying this week. The average daily demand for cash currency fell by 16.3% to $72 million. The supply of currency decreased by 14.1% to $57.4 million. According to the expert, there was no market activity, and this is an important indicator.
“Reasons for serious concern may arise if all this is accompanied by significant demand and an imbalance in supply and demand. Pressure on reserves will increase significantly, while the NBU, on the contrary, will act quite passively and not actively support the market. That would truly be a cause for concern. This time, however, if we rely on data from the NBU itself and look to see if capital joined this rally? No. The public remained quite passive. I did not see any activity from the public, which traditionally joins in on buying during such rallies,” says the expert.
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Obvious flexibility
Exchange rate fluctuations have become so ingrained in the NBU’s familiar “managed flexibility” regime that they did not attract much attention from the cash market. Instead, observing such fluctuations gives an idea of how the National Bank operates in the foreign exchange market: it takes two steps forward, then one step back, and then two steps forward again—in other words, it gradually devalues the hryvnia in this manner. And, according to economist Boris Kushniruk, no sharp devaluation should be expected. At least, not yet.
“You can’t live forever with a trade deficit like Ukraine’s. We’ll have to devalue the currency anyway, and quite significantly. We’ll have to get the budget in order and get the exchange rate mechanism in order. And then we’ll have to devalue. That’s why it’s worth doing it now—gradually, slowly, and predictably,” the expert notes.
For now, the hryvnia is strengthening thanks to the NBU. And this positive trend for the currency will continue in the coming days. That is the view of financial analyst Andriy Shevchyshyn.
“The coming week is tax season. This means exporters will be bringing in foreign currency, which will create an additional inflow of currency into the market and increase its supply. This is a factor working against continued active growth in the exchange rate. That’s the first point. Second, a decision on the discount rate is expected, and it will be interesting to see how the National Bank acts and how it explains all these movements in the currency market,” the expert notes.
Of course, NBU officials would prefer to talk about the hryvnia’s strengthening rather than its devaluation. And from this perspective, the actions they are promising—if not the strengthening of the hryvnia, then at least its stability—also seem logical.
Author: Serhiy Vasylevych
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