April 1, the next day after the first round of the presidential elections in Ukraine, the hryvnia strengthened significantly in the interbank foreign exchange market. Ukrainian hryvnia rose by 30 kopecks (more than 1 cent) against both the dollar and the euro. Most likely, this is a mere coincidence, which is irrelevant to the election.
For the first three months of 2019, the hryvnia has strengthened by 1.8% against the dollar and by 3.7% against the euro (when assessing the dynamics of the hryvnia exchange rate to the euro, it is necessary to take into account the appreciation of the dollar against the euro from 1.14 to 1.12 ). Let me remind you that the national currency of Ukraine is focused on the US dollar.
This year, a largely atypical (in relation to the previous years) situation could be observed today. In particular, we do not see a temporary, but the tangible devaluation of the hryvnia, which began in December and lasted most of January (2016–2018), sometimes affecting February (in 2015).
Probably the key role was played by the equal spending of state budget funds at the end of the year, which happened for the first time in the last five years. The most egregious case of aggressive spending of budget funds was in 2017 when in December the balance of funds in the government’s single treasury account decreased by 10.6 times.
As a result, from December 1, 2017, to January 24, 2018, the official hryvnia against the dollar decreased by 6.3%, making a significant contribution to the high consumer inflation in January-March last year.
At the same time, when compared with the previous year, one can notice the similarity of the dynamics of one factor important for the hryvnia exchange rate. I mean the investments of non-residents in government bonds.
And in January-March 2019, non-residents increased their investments in government bonds by 3.2 times (in value terms - by 0,5 billion USD). As you can see, foreign financier was not afraid of political risks. High-interest rates on government bonds, the level of which is influenced and maintained at a high level by the National Bank discount rate, outweighed the political risks.
Both in the past and this year it is mainly about the acquisition of “short” bonds by the foreigners, the circulation period of which is within the range of 3 to 6 months. Why is this alarming? But because last year we saw how the exit of foreign speculators from investments in the Ukrainian government securities led to a significant depreciation of the national currency, which was observed from late June to early September.
Thus, June 1 – September 5, 2018, the hryvnia fell against the dollar by 9%. Obviously, high oil prices played a role then, the need to pump gas into UGSs, a pause in the export of agricultural products that occurs in June-July, at the junction of the agricultural marketing year.
However, in the next few months, we should not expect any alarming events in the currency market of Ukraine.
First, the export of agricultural products from last year’s crop will continue, which was a record one. The final report of the State Statistics Committee on the harvest in 2018 was published at the end of March, confirming the overcoming of Ukraine’s historical grain production boundary at 70.1 million tons.
Also, the highest in the history of the gross harvest of corn, soybeans, and sunflower were obtained. You shouldn’t feed excessive optimism since the world prices for wheat and corn have stabilized at a relatively low level for several months. But thanks to the large export volumes, farmers will support the hryvnia exchange rate.
Secondly, a seasonal increase in demand for products and semi-finished products from ferrous metals begins (they are the second largest export item of Ukrainian exports after agricultural products). Prices show a moderately positive trend for the Ukrainian metallurgists – in the first three months of 2019, the cost of a metric ton of steel increased by 6%.
Consequently, the inflow of currency from export earnings during the spring is expected to be quite good. In addition, farmers can increase their sales compared with the usual level (due to the beginning of the spring sowing campaign and the need for large-scale purchases of fuel for its implementation).
Thirdly, purchases of natural gas in spring are traditionally reduced, which accordingly reduces the demand for the foreign currency.
Fourthly, a substantial increase in imports in the first two months of 2019 was due to temporary factors – the purchase of fuel elements for nuclear power plants, imports of thermal coal (which is declining compared with previous years, and world prices for coal decreased by almost by 10%), active importation of cars after the end of the preferential regime of customs legalization of cars with European license plates.
Finally, there is another factor that can have a positive impact on the stability of the hryvnia in the future until the end of the year. The rhetoric of the leadership of the main central banks of the world shows that the United States would not increase in interest rates and tighten its monetary policy (as well as the UK in the euro area).
This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.