CURRENCY SWINGS – HOW HIGH CAN THE DOLLAR GO?
2 February 2024 18:12
Over the past year, the hryvnia has held steady against foreign currencies. This was despite a drop in exports, the blocking of the grain corridor and shelling of critical infrastructure. The main source of foreign currency inflows to Ukraine was macro-financial assistance from Western partners. It was thanks to this assistance that the hryvnia exchange rate remained virtually unchanged. But now the aid may be reduced. Willthis mean that the NBU will turn on the printing press and the hryvnia will start to depreciate? 
asked experts whether the hryvnia will continue to weaken, what will influence it, and what are the forecasts for the future?
on 1 February, exchangers were selling the dollar at 38.2 and buying it at 37.6 UAH. Euros were sold at 41.6 and 40.8. The official NBU exchange rate was traditionally lower. We have not seen any significant fluctuations in recent months. The only exception was the New Year’s Eve rush, when the greenback jumped to UAH 42 in exchange offices. The exchange rate was boosted by two international news stories. The first was the postponement of aid to Ukraine from the United States due to disagreements between Democrats and Republicans.
Back in October last year, Joe Biden’s administration requested $106 billion from Congress to fund security needs, including $61.4 billion for Ukraine. However, the Republicans, who have a majority in the House of Representatives, demanded concessions in anti-immigration policy in exchange for support for the White House’s proposals. No compromise was found, and the vote was postponed indefinitely.
The second news of the end of last year was Hungarian Prime Minister Viktor Orban’s veto of the €50bn aid to Ukraine from the European Union. The decision was also delayed due to Budapest’s sabotage. But the exchange rate soon rolled back to previous levels anyway. However, the risk of cancellation or significant reduction of macro-financial assistance, and thus foreign exchange earnings for Ukraine, has not disappeared.
“In 2023, the exchange rate was based solely on macro-financial assistance. Any exchange rate of the national currency, as in a regular market, forms supply and demand. If you have the main supply volumes formed by macro-financial assistance, then you will, conditionally, by taking away this macro-financial assistance, create the preconditions for a very sharp drop in the exchange rate,”
– economist Oleg Pendzin comments to us. And here is the good news.
THE FIRST SWALLOW FROM BRUSSELS
The EU has agreed to allocate 50 billion euros to Ukraine. This, according to the President of the European Council, Charles Michel, will provide stable, long-term predictable funding for Ukraine. However, this amount will be spread over four years.
Against the backdrop of this positive news, the hryvnia may strengthen slightly. According to the surveyed economists say that there are no prerequisites for the hryvnia to weaken. The only thing that could change the figures on the scoreboard in favour of the foreign currency is panic. The dollar and euro traditionally rise on the back of bad news, even if it is not related to the economy or financial aid. Unsupported by anything, speculative surges usually subside quickly.
However, in the long run, this “financial cushion” may not be enough.
According to economist Oleksiy Kushch, Ukraine should receive about forty billion dollars in foreign aid annually. If we consider only the EU’s aid, we are talking about 10-15 billion euros a year. This is a large sum, but it will not be enough to cover all our needs.
“That is why the US support package is key for us. But the situation there is rather uncertain. It has actually become a hostage to a large-scale clash between two political parties – Democrats and Republicans – and there is a lot at stake in this political struggle,”
– comments Oleksiy Kushch.
At the same time, the United States is not withdrawing its support for Ukraine. Our issue remains on the list of priorities. True, it now stands alongside Israeli and Taiwanese issues. But the chances of receiving the promised assistance are still high. If the US election race gets in the way, the Biden administration has a plan B.
PLAN B
We are talking about compensators. The US has engaged countries that can provide money to Ukraine.
“These are Norway and Japan, which have already announced an increase in their contributions to support Ukraine. It could be several billion from each country. On top of that,I think there will be an active transfer of Ukraine to the International Monetary Fund loans,”
– suggests Alexey Kushch.
Meanwhile, the National Bank remains calm. In October last year, it switched to a managed flexibility regime, when the hryvnia fell by 3.3%. Some market players called on the national regulator to devalue the hryvnia, but it did not accept the proposal. Administrative levers were weakened. And financial analysts conclude that there are no threats to the national currency exchange rate now.
In the budget for this year, officials have set a projected exchange rate of 40.7 UAH per dollar. But, according to Oleg Pendzin, it will be 2-3 hryvnias cheaper. And the maximum it can reach in the near future is UAH 39.
“But those fluctuations will be completely situational and psychological, they will depend as much as possible on the mood of buyers and sellers at a particular moment,” Pendzina said.
This is, of course, assuming that everything goes according to plan with the bailout. If not, the NBU will not be able to maintain the hryvnia’s position. And the question here is: will the “printing press” be switched on at full speed?
WILL THE “PRINTING PRESS” BE SWITCHED ON AT FULL SPEED?
The hryvnia is printed all the time. The only question is the volume. The IMF has agreed on an unscheduled issue of UAH 200 billion per year for Ukraine. For example, in 2022, according to NBU Council member Vasyl Furman, twice as much was printed – 400 billion.
But what will be the consequences of such hryvnia printing now? According to Oleksiy Kushch‘s forecast, inflation may increase to 15-20%. However, there is no alternative. The money will be needed, in particular, to finance military salaries.
In summary, experts consider three key scenarios. If the promised aid is delivered, but in a smaller amount than last year and the year before, the hryvnia will weaken. Oleksiy Kushch talks about a possible devaluation of 10%. This means that by the end of the year, the dollar could rise by 3-4 hryvnias. Oleg Pendzin thinks the devaluation will be less.
The second scenario is optimistic. Our allies will provide us with all the aid they have promised, and maybe even exceed the plan. Then the hryvnia will strengthen against foreign currencies.
In the worst-case scenario, if there is no macro-financial support or it is less than 20 billion a year, our currency could fall to 45-50 hryvnia to the dollar. However, it seems that this scenario can already be ruled out. After all, the EU has demonstrated its readiness to continue to help Ukraine by quickly making the promised decision.
Now it is up to the United States.
