Here are the main factors that will affect the course:
Inside:
Maintaining a high level of gold reserves ($41.7 billion as of August 1, 2023) and approaching the next meeting of the NBU at the discount rate. Preservation of the practice of covering social spending of the budget in a non-issuance way at the expense of Western assistance insures the hryvnia on the interbank market. This also allows the National Bank to keep the exchange rate of the non-cash dollar within the range of UAH 36.5686-36.9343 without any problems.
Partially in this way, it is also possible to restrain inflationary processes, since business clearly understands the maximum rate at which it can buy foreign currency to pay for contracts, and includes it in the price of imported goods.
But this relative and very shaky stability can play a cruel joke when making a decision on the discount rate. The next meeting of the relevant committee of the NBU will be held on September 13-14. So far, analysts are inclined to believe that officials will decide to reduce the discount rate from 22% to 21-20% per annum, and will make some changes to the foreign exchange market.
The IMF insists on a return to a floating exchange rate, and this item was included in the new Memorandum of Cooperation with Ukraine. But here it should be borne in mind that import costs will begin to grow in the near future due to fuel purchases for the autumn-winter heating season. Also, taking into account the payment calendar of foreign exchange receipts from Western partners and the schedule of repayment of external and internal debts on bonds, the demand for hard currency will begin to grow in the near future.
So, if we are already moving to free exchange rate formation, then, according to the logic of individual officials, this should be done now, or already closer to the beginning of next spring.
The “pluses” of the transition to a floating exchange rate for the Ukrainian economy are now clearly less than the “minuses”. But the leadership of the National Bank listens to the recommendations of Western partners.
Therefore, I would very much like officials not to succumb to certain pressure from some representatives of international organizations, and yet continue to gradually ease currency restrictions, rather than proceed to radical actions, such as revising exchange rate rules.
After all, if the interbank market is “released” now, this will inevitably devalue the hryvnia at the first stage. An increase in the official exchange rate and interbank quotations to the average annual levels of UAH 42.2/$ included in this year’s budget and UAH 45.8 at the end of 2023 would help fill the budget. But, in general, it would be very dangerous for the fragile stability of the foreign exchange market and the economy of Ukraine.
The idea of releasing the exchange rate is also being lobbied by the remaining large exporters, arguing this with the current small volumes of foreign exchange earnings, as well as, in part, by representatives of large retail chains. The latter, for example, argue the need for a transition to a floating exchange rate by benefiting the budget. After all, with an increase in the exchange rate, prices for a part of imported essential goods will increase and, accordingly, deductions to the budget from taxes on their sales, since citizens will still have to buy them.
Although, on the other hand, the same large grocery chains are afraid of a drop in revenue with a large increase in prices due to the low solvency of most citizens.
This whole tangle of opinions and interests around the course of various groups of influence can significantly influence the mood in the Cabinet of Ministers, the Ministry of Finance, and the NBU.
On fears that the exchange rate may still be released in mid-September, part of the business is now trying, just in case, to close its contracts to the maximum, and buys foreign currency on the interbank market (mainly from the NBU) at 36.9343 hryvnia per dollar. This will continue until the meeting of the National Bank. Such market sentiment works against the hryvnia.
If the NBU can control this process on the interbank market, then the regulator’s control on the cash market is much weaker. This is a significant risk for the national currency. The last quick jump in the exchangers of price tags selling the dollar to 38.50-39 hryvnia from the more recent 37.10-37.20 hryvnia (albeit for different reasons) is the best illustration of this.
In any case, under the influence of these business fears, the market will be restless in the next week or two. And the entire burden of “quenching” these fears on the interbank market will fall on the National Bank, which will have to sell the dollar almost daily at 36.9343 hryvnia from the reserves in order to cover the shortage of supply at the auction. According to my calculations, from August 28 to September 1, he will spend at least $360-$540 million on this.
Some insurance for the hryvnia will be the upcoming increase by the National Bank of the reserve ratio for banks. From September 11, 2023, the reserve ratio for term funds and deposits of legal entities (except for other banks) will be 10% in national currency (now 0%), and 20% in foreign currency (now 10%).
A similar standard applies to demand funds and cash on current accounts of legal entities. So banks are forced to rebuild their payment calendar and deposit and credit policy right now in order to provide themselves with additional liquidity in hryvnia to meet the standard.
The issue price for them, according to various estimates, reaches 50 billion hryvnia of additional reserves in the system to the already existing standard of 298.278 billion hryvnia. This is a significant amount, the “freezing” of which will reduce pressure on the foreign exchange market and force banks to:
compete for attracting new depositors to hryvnia deposits; reduce the volume of investments in certificates of deposit; will stimulate the purchase by banks of new portions of benchmark government bonds, which is positive for the country’s budget.
See also: Who “feeds” the banks now and why they need insane profits
In any case, the behavior of clients and the volume of their operations to buy currency on the interbank market, combined with the behavior of the cash market, in the next week or two will show the prospects for the hryvnia, at least until the end of September – mid-October of this year. And the decisive factor will be the behavior of the cash market, which is still less regulated than the interbank market.
If citizens play along with the next attempts to further “warm up” the exchange rate to a new goal of 39 to 40 hryvnia per dollar, then the gap between the cash and non-cash rates will increase, which will lead to further speculative buildup of the exchange rate.
See also: The dollar is rapidly rising in price: what to do to save your savings
If effective demand turns out to be low, and the number of officially operating exchangers begins to grow again (after a reduction due, for example, to the liquidation of the license of the same Finod financial company), then the growth in the price tags of exchange offices will gradually slow down, and the cash market will become more stable.
As a protective mechanism that keeps people from buying a rapidly rising currency, three-month bank deposits should also work. This mechanism proved to be very good last year and brought down the then hype with a gap between the cash and non-cash dollar rates of 5-6 hryvnias. It should work now too.
Of the external factors, the main ones this week will be:
The reactions of all markets and the euro/dollar pair to the speech of the Fed leadership during the symposium on economic policy in Jackson Hole (USA). There were no revolutionary statements from the mouth of the head of the Fed, Jerome Powell, he preferred a cautious assessment of what is happening. And this is the main thing in the context of the difficult economic situation in the EU, against which the States look more attractive to investors, and the growing disproportions in the world: from the confrontation between China and the United States to the latest developments in the expansion of the BRICS.
The leaders of the BRICS countries (Brazil, Russia, India, China, South Africa) invited Argentina, Egypt, Iran, Ethiopia, the United Arab Emirates and Saudi Arabia to the alliance. Full membership for new members will begin on January 1, 2024.
Among the main signals of the head of the Fed was his statement, made last Friday, that the Fed is ready for further rate hikes and will continue to fight for the return of inflation to the target level of 2% per annum. That is, there is no talk of reducing the key rate yet.
“While inflation has come down from its peak, which is a welcome development, it remains too high. We are ready to raise the rate further if necessary, and keep policy at a restrictive level until we are confident that inflation is moving steadily down to our target level, ”said the head of the Fed.
Not all market participants envisioned a similar scenario of the Fed’s behavior. Therefore, this Monday we are waiting for a certain correction for the euro/dollar pair, which began on the night Asian market for Ukraine and will continue today on the European and American markets.
Due to economic news, the most intense days for the behavior of the euro/dollar pair this week will be:
Tuesday, August 29: US consumer confidence and job openings to be released;
Wednesday, August 30: German consumer price index, US GDP and a number of related data on the US economy will be published;
Thursday, August 31: German unemployment data, EU consumer price index and unemployment rate, minutes of the ECB meeting on monetary policy, as well as data on the US consumer market and the Fed’s balance sheet will be released;
Friday, September 1: The EU Manufacturing PMI is to be released as well as a series of data on unemployment, the labor market and manufacturing activity in the US.
During the announcement of all the above data, situational fluctuations of the euro and the dollar on international markets are very likely, which will immediately affect the euro against the hryvnia in Ukraine.
According to my forecasts, this week the euro/dollar pair will be within the corridor from 1.071 to 1.09 dollars per euro.
Forecast of the dollar and euro for August 28 – September 1
Interbank:
Dollar. Quotes of the non-cash dollar will remain in the already familiar range of 36.5686-36.9343 hryvnia.
Euro. Taking into account my forecast for the euro / dollar this week within the corridor from 1.071 to 1.09 dollars per euro, the euro exchange rate against the hryvnia on our interbank market these days will be in the range from 39.16 to 40.26 hryvnia.
Cash market:
The spread when buying / selling currency in most exchange offices of financial companies and at the cash desks of banks will be from 20-25 kopecks to 1 hryvnia for the dollar and from 25-30 kopecks to 1.20 hryvnia for the euro.
From time to time we can expect new attempts to play “to increase” the dollar and euro. Especially in the presence of effective demand from the population in certain regions.
Testing the hryvnia for strength in the cash market will take place all these days.
Cash dollar exchange rate. In most cash desks of banks, this week the dollar will be within the buying and selling corridor from UAH 37.40 to 39.20. In exchange offices of financial companies, this corridor will be in the range from UAH 37.70 to 39.10.
Euro cash rate. At the cash desks of banks, euro quotes when buying/selling will be within the corridor from UAH 40.60 to UAH 42.50. And in the exchange offices of financial companies, the euro currency will be quoted within the buying and selling corridor from UAH 41.00 to 42.35.
2023-08-28 04:20:00
#Forecast #dollar #euro #week #storm #market
