The purpose of this review is to analyze the current situation in the Ukrainian foreign exchange market and forecast the hryvnia exchange rate against key currencies. The current conditions, key factors of influence, and possible scenarios are considered.
Analysis of the current situation
In recent months, the national currency of Ukraine has experienced a gradual controlled devaluation. We see such actions as an attempt to achieve several strategic goals to support the economy and the budget:
Ø The appreciation of the hryvnia to realistic values – this ensures the gradual adaptation of the economy to the new macroeconomic and exchange rate reality without shocks.
Ø Agricultural export season: controlled and gradual devaluation helps to increase the income of farmers, who will receive more hryvnia for their exported products.
Ø Budget support: controlled gradual devaluation becomes a tool for balancing the budget by increasing revenues from customs duties, excise taxes, and other taxes denominated in hard currency. This makes it possible to avoid a direct increase in the tax burden on business or even partially replace it in the face of the government’s controversial tax reform package.
Ø As we predicted in our previous review, the hryvnia exchange rate against the dollar has found a temporary equilibrium at a conditional plateau around UAH 41/$, where it has been fluctuating slightly since the second decade of August.
In addition, our expectation of stabilization of foreign exchange reserves came true due to the inflow of support funds from partners and allies: according to the NBU, foreign exchange reserves increased by USD 5 billion after a four-month decline. Ukraine received the following funds:
Ø USD 4.553 billion from the EU under the Ukraine Facility program;
Ø USD 3.899 billion – a grant from the US through the World Bank.
Significant amounts of international assistance exceeded the NBU’s foreign currency sales. These funds will support exchange rate stability and play an important psychological role in maintaining the stability of the foreign exchange market.
Thus, we do not yet see any objective prerequisites for the destabilization of the dollar against the hryvnia. The cash foreign currency market is also showing signs of saturation: in 7 months of 2024, according to the NBU, banks brought a record amount of cash to Ukraine – the equivalent of USD 8.8 billion, where the US dollar dominates.
The saturation of the market with the supply of dollar cash should help to keep the exchange rate stable, except in a subjective situation – if banks want to speed up the sale of currency and try to create artificial demand.
This month, we will highlight the short-term outlook for the euro against the hryvnia, as the EU currency has its own specific drivers. The continued rally of the euro amid the stabilization of the US dollar against the hryvnia is dictated by external reasons beyond Ukraine’s control: the US monetary authorities are signaling further monetary easing and lower interest rates, which is weakening the dollar’s position in international markets. At the same time, the European Central Bank has not yet given any clear signals on interest rates, which supports the euro’s appreciation against the dollar. Therefore, in the short term, we can expect the euro to continue its upward trend against the hryvnia until clear signals from the ECB appear, which will bring certainty to the further behavior of the EUR/USD pair on international markets.
Forecast.
Short-term – for the coming months:
Given the current situation and provided that the current conditions persist, we maintain our forecast for a relatively stable hryvnia exchange rate with minor fluctuations and its temporary retention at a conditional plateau in the chart near the values of UAH 41-41.5 per dollar.
Ø In the event of a controlled deterioration of key factors or a strengthening of the exchange rate component as a tool for filling the budget, the hryvnia will drift smoothly to UAH 42-43.50 per dollar.
Long-term forecast (for a year and beyond)
As a forecast beacon, the parameters of the budget declaration, which is realistic given the current situation and a restrained forecast of its development, remain relevant, where the average annual hryvnia exchange rate is projected at
Ø 2025: 45 UAH per dollar;
Ø 2026: 46.5 UAH per dollar;
Ø 2027: UAH 46.4 per dollar.
Important factors of exchange rate stability are still factors outside the economy: the situation at the frontline and the intensity of mobilization, the severity and intensity of infrastructure and energy challenges, and the scale and regularity of international support. These non-economic factors play the role of fundamental factors in the stability of the national currency.
Recommendations and conclusions:
We maintain our buy recommendation on currencies for medium- and long-term savings and investments with a horizon of a year or more.
We do not recommend buying the US dollar for short-term purposes, given the suspension of the “exchange rate rally” with temporary stabilization and/or the likelihood of an exchange rate adjustment towards strengthening the national currency against the US dollar. In contrast, the euro remains attractive for short-term investments to obtain an exchange rate premium due to its continued smooth growth.
Financial market operators are betting that the “exchange rate rally” against both the dollar and the euro willstop – the average buying rate for both currencies by financial market operators is closer to the official exchange rate of the National Bank of Ukraine, while the selling rate is significantly higher – a clear indication that financial operators want to earn a hype premium by selling currency without buying it too expensive. A noticeable widening of the spread between the official and market buy/sell rates will be a clear indication that financial operators are betting on the start of a new protracted phase of the national currency devaluation.
Therefore, we recommend that you be careful when conducting foreign exchange transactions and not be influenced by information noise.
The banking system as a whole and the NBU have sufficient tools to maintain exchange rate stability. A noticeable shift in the situation may be caused by changes in exchange rate policy or events on international markets.
Among other reasons, the broader factors outlined in the previous forecasts remain relevant, including
Ø administrative actions aimed at further devaluation of the national currency;
Ø currency exchange regulations, which may become a driver of the shift to cash;
Ø uncertainty in mobilization and employment;
Ø uncertainty about the consequences of the revision of tax rates and fees for businesses of various sizes;
Ø infrastructure and energy challenges expected in the autumn-winter season, which may become powerful drivers of a deteriorating business climate and a new wave of seasonal emigration.
