Towards growth: What will happen to the hryvnia and the dollar in May?

In the last week of April, official dollar and euro exchange rates rose rapidly. On Thursday, April 25, the last day of the working week, the official dollar exchange rate was set at 39.6702 UAH (+0.1986 UAH), and the euro at 42.5205 UAH (+0.3372 UAH). And although the course went in the opposite direction on Monday, April 29, the residue, as they say, remained. At the same time, the NBU says that hryvnia fluctuations have market reasons. As Central Bank governor Andrey Pyshny said at the press conference, the regulator does not yet see a threat to market stability. Is there really no need to worry and what awaits the foreign exchange market in the last month of spring? these questions Focus discussed with experts.

“Managed flexibility”: everything goes according to plan

According to Andrey Pyshny, the market is currently in conditions of “controlled flexibility”, which refers to fluctuations in the exchange rate under the influence of supply and demand. “We are gradually returning to the usual parameters that existed before the war, with the participation and presence of the Central Bank in order to protect the market from excessive fluctuations,” the Central Bank governor said.

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“The strategy of the foreign exchange market has not changed for a long time. In managed flexibility mode, the regulator gently regulates the interbank market through the volume of foreign exchange interventions. “Accordingly, just as there is a certain balance between supply and demand in the market, currency changes also have a certain logic,” he said. Focus Taras Lesovoy is the head of the treasury department of Globus Bank.

According to him, exchange rate changes in May will be frequent and diverse, but they will not exceed the limits of acceptable exchange rate changes. From a strategic perspective, the market system will be the same as in previous months. First, says Lesovoy, the regime of “managed flexibility” actually excludes uncontrolled processes, that is, the market is not threatened by either a sharp collapse or a sharp increase in exchange rates.

Latter, The market has already established “rules of the game”, according to which any currency change is carried out within certain limits, without exceeding them. This applies to both daily fluctuations and weekly deviations from the first Monday exchange rate.

Third, economic factors may have a positive impact, such as the amount of aid Ukraine receives. In the large US aid package, more than $9 billion will be directed to the country’s economy, and approximately $8 billion of this will go to cover budget expenses.

Taras Lesovoy points out an interesting point: After the adoption of the aid package from the United States, total international financial aid in 2024 will cover all of Ukraine’s budget needs of $ 37 billion.

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Exchange rate fluctuations: There are no threats, but there are nuances

“If we talk about the fluctuations in the exchange rate during the day, or even for a week, the current fluctuation of 0.5% does not pose any threat to the economy,” says Natalya Boyko, founder of the SpiceProp company, and adds: “This is the reason for the exchange rate. The market needs to quickly absorb changing conditions. The course needs to change.”

The expert states that such short periods worry very few people, except perhaps foreign exchange speculators. Citizens and businesses are interested in longer horizons. What will happen to the course after 6 months? What will happen in 12 months? Citizens, managers and company owners make their economic decisions based on the answers to these questions.

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“When you look at such long-term dynamics, the situation does not seem that safe,” Boyko said in a comment. Focus. — Since December 2023, the official dollar exchange rate has increased by 9%, from 36.30 to 39.60 UAH. So, in just 5 months, the rate of weakening of the Ukrainian currency approached the annual return on hryvnia deposits, taking into account taxes and fees. Too fast”.

Devaluation increases the cost of production in Ukraine by directly increasing the cost of imported goodssays Natalya Boyko. Consumables, maintenance of foreign equipment and the like are becoming more expensive. All this further reduces demand, reduces real incomes and slows the economy locally.

Additionally, the expert adds: If the devaluation rate remains high, citizens’ pessimism will be added to the macroeconomic factors of the hryvnia’s weakness.. In this situation, people are losing faith in the support of the Central Bank and the transition from hryvnia deposits to foreign exchange instruments is accelerating. This increases the pressure on the exchange rate and weakens the domestic banking sector.

“The devaluation of the hryvnia affects inflation, but only moderately, because importers have long set an exchange rate of 40-42 UAH per dollar,” he said in a comment. Focus financial analyst Andrey Shevchishin. — Since the hryvnia/dollar exchange rate remains below 40, there will be no radical update in import sales prices at least until the end of summer. Moreover, The weakening of the hryvnia will encourage exporters and deter importers. The high rate will also deter speculators as hryvnia liquidity is limited and will also be beneficial as foreign exchange restrictions continue to be lifted. And of course, A high exchange rate is necessary to maintain budget revenues In fact, experts agree that the gradual weakening of the hryvnia against the dollar in 2024 is inevitable, but how deep could the depreciation be?

May forecasts: Why is devaluation inevitable despite billions in aid?

Natalya Boyko says that the dollar and euro will be more expensive at the beginning of June than now. However, due to the allocation of US aid, we can predict that the devaluation will not be very rapid, which may support the hryvnia.“But the macroeconomic weakness of the Ukrainian currency is not going away anywhere. Despite the negative domestic consequences, the Ukrainian economy needs a weaker hryvnia. Therefore, from a macroeconomic perspective, devaluation should continue slowly. If the rate of depreciation of the hryvnia remains as high as in the last 5 months (1.8% per month), the US dollar exchange rate will rise to 40.30 hryvnia in June and the euro to 43.20 hryvnia. “Exchange rates in the country’s banks will increase by 40-50 kopecks, that is, around 40.80 and 43.70 respectively.”

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Taking into account the main factors that can affect the foreign exchange market, Taras Lesovoy came to the following conclusion: the general situation will remain under the control of the regulator, and then the hryvnia will be out of risk of collapse. “The market is quite strong and systemic, which minimizes the emergence of negative trends,” the expert emphasized.

According to his estimation, The limits of currency fluctuations in May will be 39-41 UAH per dollar and 41-43 UAH per euro in the interbank market; In the cash market 39-41 UAH per dollar and 41-43.5 UAH per euro.

Andrey Shevchin expects the exchange rate to stabilize in the range of 39-40 UAH per dollar by August . “The euro exchange rate will continue to move due to the recalculation of the EUR/USD exchange rate in world markets. We will probably return to 1.04-1.05 within the framework of the ECB’s loosening of monetary policy and the maintenance of the Federal Reserve interest rate. Thus, the euro exchange rate may return to 41-42 UAH,” says the expert.

Dollar or euro: how to choose

Answering the question of which currency is best to buy today if possible, Taras Lesovoy noted that everything depends on the needs and goals of citizens. “The dollar is and will remain the main currency in Ukraine – it is not for nothing that the state budget depends on the dollar in its calculations. However, if a person needs euros, for example, for a trip or to send money. The expert stated that of course it would be more logical to buy euro currency for his family in Europe. Focus.

If you use the acquisition of foreign currency as a way to store funds, then the expert says that it is more difficult to give advice in this case, because inflation is simply not inherent in the hryvnia. But in the end, a lot depends on how much money we’re talking about. Options are not limited to the purchase of money: Hryvnia deposits with a net income of 6-7% or, if we are talking about significant amounts (200-300 thousand UAH and above), – Focus), buy government bonds.

Andrey Shevchishin believes that only a long-term investment will be justified when buying a dollar or euro. And the profitability from this in the base scenario will be equal to or lower than the profitability from investing in hryvnia government bonds.

According to Natalya Boyko, if foreign currency is purchased for a specific purpose, it is better to act accordingly. If this is a savings boost or an airbag, the dollar looks stronger than the euro over the next 2-4 months horizon. During this period, the price of the American currency may increase by 3-5%.

“But for six months or more, the euro looks more promising. In 12 months, the price of the European currency may increase by 7-10% against the US dollar,” the expert said and added: “Therefore, in short, it is better to focus on the dollar in futures purchases.” “For example, 70/30 is good, but in the long run, on the contrary, it is better to focus on buying euros.”