What March holds for the dollar and euro exchange rates

What happened to the hryvnia exchange rate in February

As Oleksandr Parashchiy, head of Concorde Capital's analytical department, told NV Business, grain exports through ports increased during February, which increased the supply of foreign currency. In addition, he explains, the pressure on the hryvnia which we saw during the end of December and the middle of February, which was caused by the extremely high budget expenditures at the end of 2022, has decreased.

"Accordingly, the dollar weakened somewhat over the month," he said.

Anton Boldyrev, director of the treasury and investment services department of Ukreximbank, also says that February marked a rather positive period for the domestic foreign exchange market in for the hryvnia — at the beginning of the month, the USD/UAH rate was around USD 1 per UAH 40.5, but by the end of the month it had fallen to 39.

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"In addition to the reduction of blackout risks, which supported the demand for cash currency, the impact of seasonal factors that positively affect the dynamics of the hryvnia exchange rate, such as the approach of farmers' sowing campaign, is being felt to some extent,” he stated.

“It should also be noted that the stability of the market was supported by the opportunity for the population to purchase non-cash currency with subsequent placement on deposit, absorbing part of the cash demand.”

This is indirectly evidenced by the preservation of a significant inflow of hryvnia cash into checking accounts in the banking system, which for an incomplete month already amounts to more than UAH 17 billion ($462 million) (up UAH 15 billion ($408 million) in January 2023and down just UAH 0.4 billion ($10.9 million) from February 2021).

"Additional stability of the market is provided by information regarding the further financial support of Ukraine by its Western partners in the necessary volumes, and the positive dynamics of Ukraine's international reserves, which during October ’22 - January '23 increased from$23.9 billion to $29.9 billion, or 3.7 months of the future of imports," noted the banks.

The head of the personal banking services department of UKRSIBBANK BNP Paribas Group, Ihor Levchenko, noted that the attractiveness of hryvnia assets is beginning to grow due to the increase in bank reserve requirements introduced by the NBU.

"This influence will increase,” Levchenko noted.

“Banks are beginning to offer more attractive interest rates on deposits, as a result of which the movement of funds from current accounts to deposits will reduce the highly liquid money supply, which can potentially affect the dollar exchange rate.”

What is happening with the euro exchange rate

"Since the beginning of the year, the dollar has become weaker against the euro,” Levchenko told NV Business.

“This was influenced by the speed and size of the rate hikes by the [Federal Reserve] in the USA and the [European Central Bank] in Europe, as well as the yield of government bonds in these countries. So, for example, from the beginning of the year to the end of February, the euro exchange rate against the dollar changed from 1.1 euros to the dollar to 1.06 euros to the dollar. This, in turn, affected the exchange rate of the hryvnia against the euro.”

International market participants are currently being influenced by the prospect of even tighter financial conditions from the Fed, while back in January, markets were counting on a faster transition of the U.S. central bank to a softer monetary policy. The driver of this change in sentiment was the arrival of data indicating more stable inflation while preserving the still strong positions of the U.S. economy, in particular the labor market.

"Contrary to January's expectations for a reduction in the Fed rate in December 2023 to 4.5-4.75%, the markets now predict it will further increase to 5.25-5.5%,” Boldyrev said.

At the same time, in the most "acute" scenario, the probability of the rate being around 6% is anticipated.

"On the other hand, the euro is being supported by the easing of the energy crisis in Europe, which improves the economic prospects of the bloc's countries.”

How much the hryvnia exchange rate will fluctuate in March

Bankers are confident that the hryvnia exchange rate will continue its strengthening trend in the spring.

"We expect a gradual strengthening of the hryvnia in March, as well,” believes Oleksandr Parashchyi from Concorde Capital.

“In addition, the strengthening of the hryvnia can be facilitated by more active sales of currency by farmers to finance the sowing campaign. Of the factors that can affect the hryvnia exchange rate, the main ones will be expectations of: 1) the further functioning of the grain corridor, the continuation of which should be formalized in the coming weeks, 2) the situation on the front line, and 3) the ability of the Ukrainian defense forces to withstand missile attacks on infrastructure facilities.”

According to Boldyrev from Ukreximbank, the main factor for the hryvnia exchange rate will remain the aforementioned measures of the National Bank to support the foreign exchange market.

"In addition, the near-term macroeconomic prospects can be considered quite optimistic, given the positive developments in the inflow of official financing and cooperation with the IMF,” he explained.

“Another positive factor for the hryvnia could be the impact of the start of spring field work by farmers. However, it is necessary to take into account the difficult conditions of the sector's existence, where there remains limited access to international markets and financing, in particular domestic financing.”

Anna Zolotko, director of the treasury operations department of Yunex Bank, believes that the situation at the front has a rather serious effect on Ukrainians’ mood, and not always in the way one might expect.

Read also: Individuals’ deposits in banks participating in Guarantee Fund exceed $28.7 billion

"The growth of general and economic optimism should strengthen consumer sentiment and direct the hryvnia to a greater extent towards consumption, and not towards the purchase of currency for the building of savings,” she stated.

“Therefore, the successes of the defense forces should stimulate the hryvnia to strengthen. But by the end of February, against the background of the revival of consumer demand and a steady trend towards a decrease in the value of the dollar, the selling rate of the American currency crossed the psychological mark of UAH 39/$. The last fact in itself stimulates the strengthening of the hryvnia.”

Levchenko is certain that the NBU will increase pressure on banks to increase reserve requirements for demand funds. This will strengthen the transfer of money from current accounts to deposits and reduce pressure on the cash foreign exchange market.

"Donor countries have agreed to large aid packages, which will have a positive impact on the credit and monetary policy of the NBU and will also have a positive impact on the foreign exchange market,” he said.

“My Expectations for March: cash USD – 38.1-38.4 UAH, and for the euro – 39.9-40.5 UAH.”

Anton Kurinny, a trader in the global markets department at OTP Bank, argues that the exchange rate on the interbank exchange is unlikely to change, because demand greatly exceeds supply.

"And we expect trading to be close to the rate of 36.90-36.9343 UAH to the dollar,” Kurinny predicted.

“In the cash market, the "drama" is a bit livelier and more interesting. The hryvnia began to strengthen at a fairly good pace, which, most likely, can lead to a smaller number of new 3-month currency deposits, so we believe that the hryvnia will strengthen to 38-38.50 UAH to the dollar, and then return closer to 39-40 UAH to the dollar.”

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