In Q4 2019 and Q1 2020, the National Bank of Ukraine (NBU) intends to buy up to USD 50 million per day on the interbank FX market in order to raise international reserves. That is USD 20 million more than the quantitative indicator applied up to now.
As foreign currency supply has strongly exceeded demand for an extended period, the NBU can make substantional interventions to buy foreign currency and increase international reserves. The decision proves logical, since it is driven by fundamental rather than situational factors of hryvnia appreciation.
Excess supply of foreign currency in recent months was mainly driven by proceeds from Ukrainian exports, primarily by agrarian companies selling a record harvest of grain and oil crops. Besides, the market received major inflows of foreign currency borrowed by state-owned enrterprises and foreign investments in long-term government bonds. On the other hand, despite strong hryvnia appreciation, imports showed little growth and importers’ demand for foreign currency has stayed almost flat.
“Agriculture and metals industry provided 70% of foreign currency supply on the interbank market in November. Contrary to the common belief, the continued foreign investment in hryvnia government bonds did not have a major impact on the foreign exchange market, unlike in the past months. At the same time, the NBU actively purchased excess foreign currency to increase international reserves. Net foreign exchange interventions have totaled more than USD 5.5 billion since the start of 2019,” - said NBU Governor Yakiv Smolii at the press-briefing on monetary policy issues.
NBU estimates that buying USD 50 million per day will not affect the market-driven exchange rate trend, with foreign excange supply being substantially higher than demand. Therefore it can make use of this favourable condition to pile up international reserves.
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.