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. Last Updated: 07/27/2016

Hryvna Effectively Floated, Analysts Say




KIEV -- Ukraine's battered hryvna slipped to a new official low on Wednesday, but firmed on the interbank market in what traders said was a sign the currency could be heading back up to the floor of its broken trading corridor.


But they said it was unclear how long it would stay there, and an IMF source said letting the hryvna float would not contradict Ukraine's $2.6 billion loan agreement.


The hryvna has fallen for weeks amid sharp rises in world fuel prices, boosting demand for dollars to import the fuel.


It slipped to 4.6855 from 4.6784 to the dollar Wednesday, the second day the central bank has set the official fix outside the 1999 corridor of 3.4 to 4.6 hryvnas to the dollar.


But the official rate lags by two days the interbank currency market, where dealers said bid/offer quotes had firmed to around 4.65/4.6855 to the dollar from 4.7/4.8 at the open and lower than 5 to the dollar Monday.


Dealers said large dollar sales were responsible for the hryvna's strength, but said they did not think the sales were due to any central bank intervention. The bank has said it may consider intervention but is reluctant to tap reserves.


"Everyone's already understood today that a turnaround has begun and exporters who were holding dollars decided it was time to drain them off because it's not clear at what rate they would have to drain them later," one local dealer said.


Central bank rules, introduced after the hryvna broke its 1998 corridor last summer, require exporters to sell half their foreign currency earnings on the interbank market within a certain number of days of payment.


Other traders said banks may be selling dollars to pass muster when the central bank checks that they are meeting its requirement to keep 17 percent of their total domestic and foreign currency deposits in a special central bank account.


Traders say client dollar deposits have increased in recent weeks as the hryvna has fallen, raising the amount of hryvnas that must be held in the reserve account.


News of the firmer interbank rate was sure to be music to the ears of central bank head Viktor Yushchenko, who Tuesday said he saw no reason to revise the 1999 corridor policy.


But analysts say the hryvna has effectively been floated and an International Monetary Fund official indicated the fund had approved ditching the corridor announced earlier as part of a loan agreement. "The governor of the central bank has indicated that they are allowing the currency to float rather than keeping it in the exchange rate band and that's in line with IMF policy," he said.


The reason for the discrepancy between Yushchenko's words and the IMF official's was not immediately clear, although the government is particularly sensitive to currency weakness in the run-up to a presidential election in October.


Some traders say the stronger currency is actually as much a reflection of unofficial central bank pressure on major banks not to violate the corridor as of any market factors. But they said the hryvna was likely to firm to the lower end of the corridor.


"Even if the central bank doesn't do anything, it is very possible that we will return to the 4.5 [hryvnas to the dollar] level," Nadra bank dealer Yaroslav Tsebro said.


But he and other traders declined to say whether the hryvna would remain within the corridor or for how long.


The corridor has been preserved thus far this year in large part through administrative controls, which the fund opposes, and letting the hryvna float to save reserves.


But analysts say the government is keen to keep the hryvna stable ahead of a presidential election in October.