Stable Instability of the Hryvnia Exchange Rate

The most important question about the hryvnia rate is: “How to react to its fluctuations?” No one doubts that they will necessarily take place, and they will be essential. Negative expectations cause the imbalance in buying and selling the currency, due to this, the hryvnia exchange rate is really decreasing. However, skilled players manage not only to save money, but even to win.

Experts forecast the rate of 29 USD per dollar by the end of the month. According to the forecast of the Ministry of Economic Development, the average annual rate of hryvnia will be only 28.2 UAH per dollar for the next 2019 year, and only at the end of the year it will reach 29.4 UAH per dollar. Obviously, such a forecast seems unlikely, as the risks are accompanied by planned elections and uncertainty in cooperation with external lenders.

Starting Point

From the middle of July, the hryvnia exchange rate against the dollar is falling steadily, being only occasionally interrupted by minor adjustments. The summer equator is a rather unexpected starting point, as the rate began jumping from about September in previous years. The dollar has already risen by about 7% during two and a half months. Currencies of more or less comparable economies during this period, like Belorussian and Kazakh, showed similar dynamics, Turkish and Russian currencies sagged.

Both sources of information about the currency behavior – the National Bank of Ukraine and the Ministry of Economic Development and Trade – act autonomously when informing businesses and citizens, however, they complete the general pattern from different sides. The NBU usually designates the causes of changes but doesn’t provide anyone with forecasts. The Ministry of Economic Development and Trade notes the rate when approving macro forecasts for the law on the state budget, but they don’t determine the reasons and don’t track the consequences of rate jumps. None of the departments is responsible for the actual rate of the national currency while processing wider challenges – price stability and inflation control.

There is no holding of the hryvnia rate among the main functions of the National Bank, but despite this, they regulate it while smoothing the rate’s peaks with appropriate currency interventions. We are talking about issuing hryvnia for further circulation when buying currencies in the interbank market and, contrariwise, about the withdrawal of the hryvnia when selling currencies. What’s more, the regulator does not allow the hryvnia to become over-consolidated, buying up excess amounts of the currency to replenish gold reserves.

The Reasons are Special and Ordinary

The NBU commented on concerns about the currency market in July. They stated that these concerns were driven by businesses’ actions, especially transferring dividends abroad. In addition, officials of the department explained increasing demand for the currency by seasonal, situational and psychological factors. For instance, an increase in the importers’ demand for energy resources in order to pay for gas and oil products due to early crop (the beginning of harvesting as well as rising incomes among the population and the consequences), expenses on imported goods and consumer services, for example, equipment, food, travel, etc.

The traditional negative pre-autumn expectations have also influenced the hryvnia rate. The supply of the currency by the population has decreased due to the psychological pressure in the cash market. This affected the operations of banks in the interbank foreign exchange market.

In addition to the already listed specific internal factors, external ones – common for other currencies as well – affected the hryvnia volatility. First of all, this refers to a noticeable strengthening of the dollar during the end of July and mid-August, that makes currencies of developing countries reduce automatically. Moreover, catalysts for such a reaction were trade wars against several world economies declared by the US. In fact, the hryvnia did not dramatically decline compared to other currencies. Most likely, this happened due to the low integration into the global economy.

Foreign investment and external loans could support the national currency, but the volume of foreign direct investment is at the level of 2015, and getting loans is complicated due to the non-fulfillment of IMF conditions regarding gas tariffs.

Rules of Conduct

“How to react to the hryvnia instability?”, “Will it be possible to insure against losses and to use the situation for the own benefit?” are standard questions of businesses and citizens in such a situation.

According to bankers, few people want to fully trust the national currency. Clients prefer to save the US dollars and euros, distributing savings around 50/50. However, some of them tend to risk with the hryvnia in order to win with the fluctuations of its exchange rate. Since the introduction of the flexible exchange rate of the national currency, those fluctuations have become seasonal, so, timely conversion of one currency to another one allows you to significantly increase the return on investment. There is a specific cycle of three years, where the peak of the dollar rate falls at the end of winter and changes to the end of summer with a gradual appreciation of the hryvnia, followed by a return to growth. Thus, interested players convert funds to the hryvnia in the first half of a year, and to dollars in its second half. The difference in interest rates can reach 3.5-4 times.

In the context of exchange rate fluctuations caused by attractive income and lack of taxes, currency bonds of the domestic state loan (T-bills) have become popular. They are of high liquidity and can be a peculiar alternative to both currency deposit and cash. Such bonds can be sold and bought in the secondary market at the right moment at the current exchange rate for hryvnias. Lastly, the Ministry of Finance attracted funds for currency bonds at 5.95% per annum, which significantly exceeds the average interest rate on deposits in dollars.

Market experts also note that there is a peculiar price gap with the fluctuations of the hryvnia exchange rate. It’s about the fact that prices for goods and services (mainly large-scale or imported) don’t react to them instantly, but have an inertia of sustainability of about half a month and 1.5 months. However, keep in mind that the real estate market is specific – it is significantly “heavier” and less responsive. So, having plans for a big purchase, you can somewhat benefit from the rate jumps, if you catch the right moment for relevant transactions.