NBU’s mistake not to be repeated

The above factors of temporary hryvnya stability have assumed that
temporary portfolio capital inflows are sufficient for strengthening
hryvnya rate. As NBU has been pursuing the managed float
exchange rate policy it has allowed for unjustified hryvnya
appreciation in April when temporary debt capital inflows were
exceeding trade deficit by especially large volume.

Among the negative effects of appreciation were:
• Profit-taking by foreign investors and massive sell-off of state
treasuries (OVDPs) by non-residents in amount of UAH 1.6
bln. It was the additional factor pushing the non-resident equity
funds to shorten their positions.
• More expensive hryvnya resources as banks focused on US
dollar and euro lending where the demand prevailed.
• Real effective appreciation of hryvnya to the main trading
partners by 9.4% YTD and worsening competitiveness for
leading exporters.

The NBU stayed away from interventions when foreign currency
supply exceeded the demand and interbank rate appreciated to 4.6
UAH/$, much below its official 4.85 UAH/$. It intervened during the
summer months bringing its gross foreign exchange reserves to the
new record of $38 bln. When foreign currency deficit started in
September due to lack of portfolio capital inflows and necessity of
$1.5 bln payment for imported gas, the interbank rate devalued to the
level above 5.00 UAH/$, which triggered the expectations of further
devaluation by households. They began massively purchasing foreign
currency and bought $1.3 bln more than they sold in September.
The NBU has been keeping its official rate close to 4.85 UAH/$
anyway. The Monetary Policy Guidelines for 2009 approved by NBU
Council allow for the fluctuation within 4.6-5.1 UAH/$ band but we
doubt the NBU will let hryvnya appreciate in tougher conditions of
2009.