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Planned FX Purchase Interventions on the Interbank Market Increase to USD 30 Million per Day

Planned FX Purchase Interventions on the Interbank Market Increase to USD 30 Million per Day

In Q4 2019, the National Bank of Ukraine (NBU) intends to buy up to USD 30 million per day on the interbank FX market in order to raise international reserves. That is USD 10 million more than the quantitative indicator applied in Q2–Q3 2019.

As FX market conditions have been favorable throughout most of the year, the NBU can replenish international reserves without interfering with the hryvnia exchange rate determined by fundamental economic factors. Overall, in January–September 2019, net purchases of foreign currency by the NBU on the interbank FX market was USD 3.9 billion. Over the same period, the official hryvnia exchange rate improved by 12.5%.

The NBU’s capacity to increase its FX purchases owe to new fundamental factors for supply of foreign currency on the interbank FX market.

Primarily, these factors include stable cash inflows from nonresidents in the hryvnia government debt.

“Macrofinancial stability in Ukraine, this year’s extensive liberalization of capital movements, creating a convenient infrastructure through the Clearstream link, and current developments on the global financial market favored Ukraine’s integration into the international capital markets. At the same time, it is not the wish to speculate that drives nonresident demand for hryvnia domestic government bonds. Respectable institutional investors invest in the Ukrainian government debt, encouraged by not only high interest rates, but also a good investment environment. So active participation of nonresidents in the Ukrainian state debt is no longer a temporary occurrence, but rather a new fundamental factor that determines and will continue to determine FX market trends,” noted Deputy NBU Governor Oleg Churiy.

A record growth in grain yields in Ukraine is another fundamental factor for the present and future FX market conditions. In particular, according to preliminary estimates, this year’s yields of wheat and barley have been the highest since the early 2000s.

“This means that proceeds from exports of record yields that continue to fuel FX supply are not a seasonal factor caused by weather, but a result of the new factor that will have a long-term effect on the FX market conditions,” said Oleg Churiy.

On the other hand, the real sector has shown no significant demand for foreign currency. In September, even large external payments by state-owned enterprises were made using loans taken out earlier on the international markets.

In such conditions, according to the NBU estimates, larger FX interventions will foster replenishment of international reserves without interfering with the market-driven hryvnia exchange rate, meaning that the hryvnia exchange rate should reflect the market conditions, as set out in the Foreign Exchange Intervention Strategy for 2016–2020.

As a reminder, since April last year, in order to enhance transparency of its monetary policy in terms of FX interventions, the NBU has started to make regular announcements of the amount of its FX purchase interventions aimed to replenish the international reserves of Ukraine.

The planned amounts of interventions are exclusively of indicative nature.  Depending on the market conditions, FX purchasing interventions may be less in amount or not take place at all. Daily purchases may exceed the announced amount. However, such interventions will be conducted for other purposes set out in the Foreign Exchange Intervention Strategy of the National Bank of Ukraine for 2016–2020, particularly to smooth out strong fluctuations on the FX market.

Setting quantitative indicators for daily interventions is an important element of the floating exchange rate regime. This regime does not require the NBU to maintain a specific exchange rate. The central bank’s presence on the FX market aims at accumulating international reserves, balancing the FX market, and supporting transmission of the key policy rate.

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