Issue No. 1 – February 2025
The purpose of this review is to provide an analysis of the current situation on the Ukrainian foreign exchange market and a forecast of the hryvnia exchange rate against key currencies based on the latest data. We review current conditions, key influencing factors, and likely scenarios.
February 2025 started quite predictably for the Ukrainian FX market, without any sharp jumps or sudden shocks. After the traditional New Year’s Eve surge in demand for foreign currency, the market has gradually returned to a calmer state, and the hryvnia exchange rate continues to balance between domestic factors, such as the NBU’s policy and the country’s balance of payments, and global trends, such as the policies of the US Federal Reserve and the ECB.
The US Federal Reserve continues to keep interestrates high, strengthening the dollar, while the European Central Bank has cut interest rates, weakening the euro. This creates the preconditions for maintaining the current exchange rate dynamics, but also adds unpredictability for those planning currency transactions.
Analysis of the current situation
The hryvnia is gaining stability again
As predicted at the end of January, after the peak growth of the dollar (up to 42.28 UAH/$), the situation has gradually stabilized, and now the hryvnia is in the range of 41.37-42 UAH/$.
What contributed to this?
The situation is somewhat different for the euro. After the ECB unexpectedly cut interest rates in February, investors’ funds began to flow into the dollar en masse, which led to a weakening of the European currency. As a result, the euro exchange rate in Ukraine fell to the level of 43.2-43.9 UAH/€, and has been showing a steady downward trend for three months.
The market spread between the purchase and sale of key currencies has remained relatively stable for a long time: 50-58 kopecks for the dollar and 63-68 kopecks for the euro. This indicates a balance between supply and demand and can be considered both an indicator of the lack of appetite for speculation among currency market operators and an indicator of the absence of panic among the population.
Dollar exchange rate forecast
Short-term forecast (2-4 weeks)
The dollar exchange rate may fluctuate in the range of UAH 41.8-42.5/$. The NBU continues to actively restrain sharp fluctuations, as evidenced by the sale of foreign currency from reserves, and no major inflationary risks are expected in the coming month.
However, risks remain:
Medium-term forecast (2-4 months)
During the first half of the year, the hryvnia may gradually weaken to 44 UAH/$. Main reasons:
Long-term outlook (6+ months)
If the current macroeconomic picture persists, the dollar may reach 45 UAH/$ by the end of the year, although this scenario is entirely dependent on the success of the government’s economic policy and the stability and sufficiency of external financing inflows.
Euro exchange rate forecast
Short-term forecast (2-4 weeks)
The euro will be in the range of 43.0-44.2 UAH/€, with a gradual correction to the lower bound due to the euro’s weakness on the global market.
Medium-term forecast (2-4 months)
The euro may fall to 42.5 UAH/€ if the eurozone stagnation intensifies and the US Federal Reserve maintains its tight policy.
Long-term outlook (6+ months)
If the EU fails to recover from the economic downturn, the euro may remain weaker, allowing the hryvnia to maintain relative stability against it, and in some periods, the hryvnia may even strengthen against the euro.
Recommendations for businesses and investors
In the short term (up to 1 month), the main task is to ensure liquidity and minimize currency risks. Businesses should have a portion of their working capital in foreign currency, especially if their expenses depend on imports. Keeping funds in short-term deposits in US dollars or euros will help protect against exchange rate fluctuations. For private investors, now is not the best time to actively enter long positions in euros due to the weakness of the European currency, while the dollar remains a stable instrument. For those considering currency speculation, there may be opportunities to make money on short positions.
Medium-term strategies (2-4 months) should focus on building a balanced portfolio with a predominance of the dollar. As the US Federal Reserve is in no hurry to change its tight monetary policy, the dollar remains the most stable currency for capital preservation. Investors who want to diversify their portfolio should pay attention to assets in Swiss francs and British pounds, as they are less prone to strong fluctuations under the influence of geopolitical risks. Cryptocurrencies can be an interesting tool for short-term speculation, but they remain high-risk due to their high volatility.
In the long term (6+ months), the most important factor isto protect capital from devaluation risks. The main savings should be kept in hard currency, as even with a moderate devaluation trend, the hryvnia will continue to lose value. Alternative assets, such as gold, can be an effective means of preserving value, but the current high prices make it less attractive for immediate entry – it is worth waiting for a possible correction.
This material was prepared by the company’s analysts and reflects their expert, analytical professional judgment. The information presented in this review is for informational purposes only and cannot be considered a recommendation for action.
The Company and its analysts make no representations and assume no liability for any consequences arising from the use of this information. All information is provided “as is” without any additional guarantees of completeness, obligations of timeliness or updates or additions.
Users of this material should make their own risk assessments and informed decisions based on their own evaluation and analysis of the situation from various available sources that they consider to be sufficiently qualified. We recommend that you consult an independent financial advisor before making any investment decisions.
REFERENCE
KYT Group is an international multi-service product FinTech company that has been successfully operating in the non-banking financial services market for 16 years. One of the company’s flagship activities is currency exchange. KYT Group is one of the largest operators in this segment of the Ukrainian financial market, is among the largest taxpayers, and is one of the industry leaders in terms of asset growth and equity.
More than 90 branches in 16 major cities of Ukraine are located in convenient locations for customers and have modern equipment for the convenience, security and confidentiality of each transaction.
The company’s activities comply with the regulatory requirements of the NBU. KYT Group adheres to EU standards, having a branch in Poland and planning cross-border expansion to European countries.
The official hryvnia exchange rate, after rising by 5 kopecks on Wednesday, dropped by 17 kopecks on Thursday to 40.8823 UAH/$1, a new all-time low.
According to market participants, the exchange rate came close to the level of 41 UAH/$1 near the end of interbank trading.
The reference value of the hryvnia exchange rate set by the National Bank of Ukraine (NBU) at 12:00 on Thursday fell by 16 kopecks to 40.8423 UAH/$1, while on the cash market the dollar rose by 12 kopecks to 41.10 UAH/$1.
A day earlier, the National Bank announced new easing of currency restrictions, in particular, it facilitated servicing of Eurobonds through dividends of guarantors and sureties. In addition, on July 11, the NBU expanded the list of defense goods available for purchase abroad for volunteers and allowed businesses to buy foreign currency to repay loans from international financial institutions (IFIs).
Since the beginning of 2024, the official hryvnia exchange rate has depreciated by 7.6%, or UAH 2.88, and since the NBU switched to managed flexibility on October 3, 2023, it has depreciated by 11.8%, or UAH 4.32.
In June, the official hryvnia exchange rate fell by 3 kopecks to 40.5374 UAH/$1, although in the middle of the month the exchange rate hit a record low of 40.6908 UAH/$1, while in May it fell by 90 kopecks.
The NBU attributed the weakening to increased government spending after receiving external financing in March-April, as well as the impact of the largest package of currency restrictions for businesses since the start of the full-scale war announced on May 3.
The NBU’s net sales of dollars in the first week of July decreased to $630.91 million from $670.41 million in the previous month. In June, it amounted to $2.99 billion compared to $3.07 billion in May.
Earlier, the Center for Economic Strategy (CES) released an updated consensus forecast of seven investment companies and think tanks. According to it, the forecast for the hryvnia exchange rate at the end of this year has been lowered from 40.5 UAH/$1 to about 42 UAH/$1, which generally correlates with the 42.1 UAH/$1 set in the state budget for the end of 2024. The forecast for the average annual exchange rate was also downgraded from 38.7 UAH/$1 to 40.1 UAH/$1, compared to the budgeted level of 40.7 UAH/$1.
The reference exchange rate of the hryvnia to the US dollar on the interbank foreign exchange market as of 12:00 a.m. on March 7, 2024.
Indicator 06.03.2024 07.03.2024 07.03.2024 Change, %.
Reference hryvnia to US dollar (UAH/$) 38.3099 38.1029 -0.54
The International Monetary Fund (IMF) supports the decision of the National Bank of Ukraine to switch from a fixed exchange rate regime to a managed flexibility regime starting October 3, and believes that this will further support the stability of the economy and the foreign exchange market, said Natan Epstein, Deputy Head of the IMF Mission to Ukraine.
“The ability to manage the exchange rate in a way that minimizes fluctuations seemed to us to be an important step forward,” he said at a briefing in Kyiv on Wednesday.
Epstein reminded that as part of the program, the NBU in late June approved a strategy supported by the Fund to normalize its monetary and exchange rate policies, which includes a relaxation of exchange controls, as well as a gradual increase in exchange rate flexibility and, ultimately, a return to the inflation targeting system.
According to the deputy head of the mission, the conditions necessary for abandoning the fixed exchange rate have been met, primarily a decline in inflation, a stronger position of international reserves, and stability in the foreign exchange market.
In general, Epstein noted the trust that the NBU managed to gain in managing monetary and foreign exchange policy during the war.
The IMF representatives also expressed satisfaction with the existing dialog between the NBU and the Ministry of Finance and its results, which do not call into question the independence of the central bank.
According to the Ministry of Economy, the average annual exchange rate of the hryvnia to the US dollar in 2023 is expected to be 37.5 UAH/$1 in the draft state budget for 2024, compared to 32.3 UAH/$1 last year.
For 2024, the draft state budget provides for an average annual exchange rate of 41.4 UAH/$1.
As reported, the average annual exchange rate for this year during the adoption of the state budget for 2023 last fall was expected to be 42.2 UAH/$1, and the exchange rate at the end of 2023 was 45.8 UAH/$1.
At the same time, the National Bank has kept the official hryvnia exchange rate fixed at 36.57 UAH/$1 since the end of July 2022. On the cash market, the exchange rate has stabilized at around 38 UAH/$1 this year, while last year it was falling to 39 UAH/$1 and even more.
Over the past week, following the announcement by Finance Minister Sergii Marchenko of the forecast for the average annual exchange rate for 2024, the hryvnia has fallen to 38.3 UAH/$1 on the cash market.
In a September survey, members of the European Business Association predicted an average annual exchange rate of 41 UAH/$1 for 2024, while a year ago they expected 43 UAH/$1 for 2023.
The transition from a fixed to a floating exchange rate with a temporary limitation of daily exchange rate fluctuations within a narrow range is proposed by UC Berkeley economics professor Yuriy Horodnichenko in an article on the analytical platform Vox Ukraine.
“Because of the nature of a fixed exchange rate, potential price distortions and imbalances accumulate over time, and the economy eventually reaches a tipping point where an exchange rate adjustment is needed again. Consequently, another exchange rate correction during a protracted war will almost certainly happen,” he explained the need to abandon this regime.
According to Gorodnichenko, among the imbalances already visible are an increase in the real exchange rate, a gap between the official and cash exchange rates, a lack of attention to the euro (since the EU is Ukraine’s main trading partner) and the political postponement of necessary exchange rate adjustments.
“Given the high sensitivity of inflation expectations to the exchange rate in Ukraine, a free floating exchange rate could entail excessive macroeconomic volatility. Indeed, the hryvnia fluctuated sharply during 2014-2015 after the first Russian invasion. We need an intermediate solution,” said the economist.
In his opinion, limiting daily fluctuations in the exchange rate (for example, 0.1% on any day) could be an acceptable intermediate solution. Among the advantages of this option Gorodnychenko mentioned operational freedom of the central bank, the absence of sharp macroeconomic adjustments and shocks, the NBU’s management of the euro-hryvnia exchange rate during Ukraine’s accession to the EU.
He added that such a regime does not mean a mandatory devaluation of the hryvnia. “The experience of the hryvnia during the COVID-19 crisis highlights how useful this is for Ukraine: after the hryvnia weakened during the first days of the crisis, it eventually strengthened as demand for Ukrainian products remained high. Due to such flexibility the Ukrainian economy felt relatively well in 2020-2021,” reminded the economist.
Gorodnychenko stressed that this policy alone cannot solve all problems, such as the broken mechanism of monetary transmission, and to achieve the desired results it will need to be supplemented by other measures, particularly restricting capital flows, the alignment of interest rates on deposit certificates of the NBU and government bonds.
The economist pointed out that there are other options for intermediate solutions, but they are, in his opinion, less preferable.
