The Ukrainian hryvnia has been swinging in wildly in trading on Thursday as it has been buffeted by major announcements by the central bank. First, the central bank made it clear it can no longer support the currency with regular interventions and will allow greater fluctuations. Shortly thereafter, the central bank announced a 5.5% rate hike to stabilize the economic situation.
The hryvnia was down as much as 46% the U.S. dollar early on Thursday. However, the rate hike appears to have stabilized the situation somewhat as the hryvnia was trading 18% lower at 18 hryvnias per dollar as of 9 AM ET
Statement from Ukraine Central Bank
Be careful what you ask for, especially if you’re the governor of a central bank. Just ask National Bank of Ukraine Governor Valery Gontareva who told the media “Get used to market volatility“ on Thursday morning, and then watched the hryvnia lose almost half its value in the next couple of hours.
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Two exchange rate system scrapped
The National Bank of Ukraine announced it was ending the indicative exchange rate on Monday. The NBU began using $3 million currency auctions last fall to create indicative rate serving as a benchmark for banks after the currency was down 50% against the dollar.
However, the indicative rate did not match the market exchange rate. As of January 30, the weighted average auction rate was 16.0072 UAH to the dollar, but the market exchange rate was much highler at 21.10 UAH per dollar.
Beginning February 5, the single exchange rate on the interbank currency market will be used instead of the indicative exchange rate.
Also of note, all future currency auctions have been cancelled until further notice.
Analysts at Kiev based Eavex Capital note:
The National Bank announced an introduction of what it called a “single currency exchange rate” starting from today (Feb 5). The official UAH/ USD rate was at UAH 16.73/USD yesterday, while the actual trading rate soared to UAH 23/USD. It is unpredictable where the UAH/USD rate will stabilize over the next couple of weeks, but we believe that the elimination of the two-month-old gap between the NBU rate and the market rate should have a positive effect on the economy.
John Kerry visiting Ukraine
U.S. Secretary of State John Kerry arrived in Kiev on Thursday to discuss further financial aid among other topics. Ukraine’s economy is not only plagued by a weak currency, but also a high debt and slipping foreign currency reserves.
The country has already secured a $17 billion aid package from the IMF, and first two tranches totaling $4.6 billion have been sent. However, the IMF is concerned regarding Ukraine’s slow progress in economic and political reform and its bloated 2015 budget, and has not yet released the third tranche.
The IMF is expected to make a decision on the next tranche later this week.
Ukraine already has a promise from the EU to provide $2.05 billion in financial aid, and the U.S. has committed to a similar amount in grants and loan guarantees.