Ukraine hryvnia strengthens to UAH 25.44/USD

Ukraine’s national currency, the hryvnia, strengthened
to UAH 25.44/USD on Aug. 21, which is a 1.6% increase since the start of the
month (and 6.9% growth YTD).  The National Bank of Ukraine (NBU) actively
intervened at the ForEx to prevent the national currency from further
appreciation. The NBU purchased USD 191 mln at the market since the start of
the month. In July, the NBU purchased at the ForEx USD 29.8 mln in total.

Alexander Paraschiy: The
hryvnia’s strength is being driven by improving export prices (steel product
prices have risen 4%-23% YTD, farm commodity prices 2%-6% YTD) and positive
consumer sentiment. Provisional customs statistics indicate that the trade
deficit kept on expanding in July (USD 2.8 bln for 7M17 vs. a USD 1.0 bln
deficit a year ago). However starting in August, we should see the positive
consequences of rising prices on the global markets.

We know little about the scale of trade balance
improvement: a fast recovery in imports might eat up a large part of export
proceeds. At the same time, we are confident that ongoing individual cash
returns to the banking system is fueling the current hryvnia strengthening. In
June alone, Ukrainians returned to the banks (sold or deposited in saving
accounts) USD 553 mln (in addition to USD 378 mln in May) and this trend has
been likely preserved (or even strengthened) amid further hryvnia
appreciation. 

The hryvnia’s steady appreciation has raised many
questions on whether an expected U-turn at the ForEx through the fall months
will happen. Indeed if stronger export prices substantially narrow the trade
deficit, depreciation pressure will be much less than projected. 

Nevertheless, we still believe that intensified
economic and political activity through the fall will return the exchange rate
to a more traditional trajectory. So far, we are keeping our projection
unchanged at UAH 28.0/USD by the year end.