Ukraine’s troubled domestic economy took a further turn for the worse today as the country’s sovereign currency, the Hryvnia, decreased in value by more than 45% compared to the US dollar.
Congruent with the recent decision by Switzerland’s central bank to remove the peg which was set at 1.2 between the Swiss franc and the Euro, this sudden and dramatic decline in the value of the Hryvnia has been brought about by a similar action.
National Bank of Ukraine Governor Valery Gontareva stated that the central bank can no longer support the currency with regular interventions and will now begin to allow greater variations in value, a statement which initially created a 34% decrease in value compared to the dollar.
US Dollar to Ukrainian Hryvnia chart (10 year) seen moving away from it’s historical caps
As a double edged sword, the interest rate has increased to a stratospheric 19.5%, which is higher even than Russia’s increase to 17% in December 2014 during the time of the ruble liquidity crisis which caused a number of retail FX firms to temporarily suspend trading in ruble pairs.
Ukraine, which has a nominal GDP per capita of only $2,900, which is by a very large margin the lowest of all of the Commonwealth of Independent States and the lowest in the developed world, has faced several economic crises since the demise of the Soviet Union 25 years ago, with the most recent ones being extremely severe.
Bearing in mind that a large percentage of the nation’s population earn just $50 per month, the interest rate rise to 19.5% would at first appear somewhat catastrophic, as repayments on any loan would become impossible, however it is clear that this rise prevented the Hryvnia from suffering an even greater freefall.
In terms of analysis from industry professionals, Tim Ash, Chief Emerging-Markets Economist at Standard Bank Group Ltd. in London explained to Bloomberg “Getting the Hryvnia to a clearing level was likely a requirement for the IMF. The currency is trying to find its level.”
“We are not able to keep a fixed hryvnia rate,” Ms. Gontareva explained to reporters. After discussions with commercial lenders and the IMF, she continued to determine that “concluded that there is no sense to use other methods to find a new balanced exchange rate than by just freely floating it.”
Ms. Gontareva’s stark warning was that all market participants should “prepare for greater volatility.”
Due to the Hryvnia not being a currency which is either a major, or is the subject of much demand among retail or institutional traders, and is avoided by traders in the interbank market, it is very unlikely that the Ukrainian government’s decision to not support the currency any more will have the same effect as the CHF Black Swan event in January, however it certainly shows that there are indeed currencies out there which can make spike-like moves.
As nervousness perpetuates the entire Western and Eastern European markets, we certainly operate in changing times.