Hryvnia continues to strengthen, defying expectations

By Igor Kossov. Published Dec. 11. Updated Dec. 11 at 5:49 pm

The photo, released on Nov. 26, 2019, by the press office of the National Bank of Ukraine, shows new hryvnia banknotes. The hryvnia has been gaining in value throughout the fall season, defying earlier predictions by exporters and economists.Photo by Photo by Yelyzaveta Serhiienko/ Press office NBU

The Ukrainian national currency, the hryvnia, is still riding high, flying in the face of most predictions that it would depreciate against the U.S. dollar in the fall and winter, as it usually does.

The Ukrainian currency hit Hr 23.69 per $1 on Dec. 11, according to the National Bank of Ukraine, while a slew of financial analysts in late summer had predicted it to be above Hr 27 per $1 by now. 

The dashed expectations are a blow to Ukraine’s exporters, especially in the agriculture sector. The rate also drew the ire of protesters rallying in front of the NBU, many of whom are suspected of being paid by the central bank’s enemies.

“Something happened that had never happened before,” said Ruslan Chorniy, the managing partner of Financial Club, an independent banking market research firm, referring to the sudden break in the hryvnia’s seasonal trend.

The hryvnia usually falls relative to other currencies in the fall, when Ukraine imports energy and farmers need fuel to harvest crops. As the end of the year nears, the government plans its largest expenses. All this causes the hryvnia’s value to fall. In the spring, farmers get revenues, boosting the currency.

But psychology also plays a role in the hryvnia’s fluctuation: Everyone expects it to decline in the fall, according to Serhiy Fursa, the head of fixed income at Dragon Capital. 

The hryvnia has been gaining ground since the summer. A key reason was this year’s trend: Insatiable portfolio investors pouncing on hryvnia treasury bills in record amounts. 

In the first 11 months of 2019, nonresident investors bought more than $4 billion worth of treasury bonds, chasing its extremely high real yield. The hryvnia was one of the world’s best performing currencies in 2019.

Ukraine’s deal with the international securities depository Clearstream, which greatly simplified the ability of foreigners to buy Ukrainian securities, also contributed a great deal. 

Treasury bond demand “was a key factor,” said Oleksandr Paraschiy, head of research at investment firm Concorde Capital. “But we also see that the trade balance is much better than it was a year ago.” 

Paraschiy said that lower oil and gas prices and less active Ukrainian importers contributed to the trend. Much will depend on the ongoing gas talks with Russia. If an agreement to transit Russian gas through or into Ukraine is reached, gas prices could fall even farther and there will not be significant downward pressure on the strengthen of the hryvnia. 

Agriculture loses

Nikolay Gorbachov, president of the Ukrainian Grain Association, told the Kyiv Post last month that stronger hryvnia hurts exporters, who often make deals against future expectations and receive lower earnings on exports. 

“We have a negative trade balance,” said Gorbachov. “The strengthening of one’s own currency is more of a negative than a positive sign.” 

Chorniy said that players in Ukraine’s agricultural sector were waiting for the hryvnia to decline in fall.

“Agriculturists are used to selling currency at a high rate. They waited for September when there will be a surge in the interbank market so that they would sell at a high rate,” he said. Their hopes were dashed when the hryvnia rate failed to fall and they were forced to sell their reserves haphazardly, which contributed to the current trend.

“We had a forum with agriculturists last week, and they confirmed our guess that they were trying to play with the rate expectations as usual and they lost,” said Chorniy. 

NBU will not interfere

Bohdan Danylyshyn, chairman of the NBU council, cautioned on his Facebook page that a strong hryvnia combined with industrial deflation in 2019 could lead to enterprises or entire industries becoming unprofitable and reducing their production due to the rigidity of costs. 

He also warned against the NBU leadership’s “orthodox inflation targeting,” overly strict monetary policy and avoidance of interference. He believes the hryvnia’s strength is not supported by economic fundamentals.

In a statement, the NBU said that it is not willing to interfere with the hryvnia’s fluctuation, and that a flexible currency is healthier because Ukraine is significantly exposed to external markets. Artificially maintaining a constant hryvnia rate would cost tens of billions of dollars in international reserves, the bank wrote. 

“If the NBU, regardless of the real economic situation, did not allow the hryvnia to strengthen, but held the rate at Hr 26 or 27 per $1, what would business and the population think?” the central bank stated.

“They would perceive that the NBU is protecting this rate and, thus, the interests of certain interested parties. Then, trust in the NBU and the national currency would fall and everyone would prefer to invest in foreign currency, which would push the hryvnia into devaluation.”

Additional reporting by Natalia Datskevych


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