On February 3, I posted a chart of the
"official" exchange rate at 16.24 hryvnias to one US dollar. In
reality, the true exchange rate on the black market was on the order of 21.5
hryvnias to the dollar.
See Black Market in Ukrainian Currency Masks
True Extent of Decline; Banks Impose 30% Foreign Exchange Fee; Freely
Floating Hryvnia Announced.
Rumor had it that Ukraine would float the currency today. That rumor was
correct as was my call as to what would happen. This is what I said on
February 3:
How Low Will It Go?
From 8 [a valuation just over a year ago] to 21.5 represents a 62.7% decline.
And I suspect it won't stop there. Why should it?
A plunge from 8 to 30 would be a 73% decline in just over a year. And that's
my initial guess barring some quick monetary rescue by the IMF.
If and when the Ukrainian National Bank does float the currency, other sites
will note the "shocking overnight" plunge.
In reality, the plunge has already taken place, over time. The charts
just don't show that yet.
Hryvnia One Day Price Action
Chart courtesy of Bloomberg. Click on chart for sharper
image.
The decline shown today is 45.13%, but as stated above, that decline really
occurred over time, as measured by the black market.
What are those intraday gyrations are all about? I strongly suspect
intervention to prevent an even bigger plunge. If so, another collapse is
coming up.
In the last year the Hryvnia sunk from 8.29 to the dollar to 24.35 to the
dollar. That's a decline of 66%, not far off my 73% projection.
It will get there, and probably more unless the IMF steps in very soon.
Ukraine Floats Currency, It Sinks
Bloomberg reports Ukraine Floats Currency, It Sinks.
In recent months, Ukraine was probably
pursuing the most clueless exchange rate policy in Europe. In the run-up to
the October parliamentary election, President Petro Poroshenko used his good
relationship with National Bank governor Valeria Gontareva to persuade her to
keep the exchange rate below 13 hryvnias to the U.S. dollar. In late
September, banks were ordered not to sell more than 3,000 hryvnias' worth of
foreign currency per day to their customers. At the same time, the National
Bank started holding special auctions in which it sold $3 million per day to
banks to set a so-called "indicative rate" that they were supposed
to follow in transactions with clients.
After the election, even that artificial rate dropped quickly, moving to 16
hryvnias per dollar in a matter of days. The banks, however, only displayed
that rate at exchange offices, where citizens could barely buy any foreign
currency anyway. Among themselves, they traded at rates that were about 20
percent higher than the official one. For ordinary Ukrainians, there was also
a lively black market, where rates were closer to the interbank ones than to
the official benchmark.
Today, Gontareva announced the end of indicative auctions, allowing the banks
to move to a single, market-determined rate. The result was a collapse of the
hryvnia's value.
At a press conference today, Gontareva vehemently denied that she had agreed
to an exchange rate of 25 hryvnias to the dollar with the IMF. "It's not
even being considered," she said. But at the time of this writing the
hryvnia was trading at 24.85 to the dollar.
The National Bank's decision to float the hryvnia will hardly change anything
for citizens or businesses -- they just won't have a useless official
exchange rate to laugh at. Ukraine saw 25 percent inflation last year; this
year, prices will keep rising at a fast clip.
Today, the National Bank said its international reserves had shrunk to $6.4
billion at end of January.
The Ukrainian financial authorities' blundering has worsened the country's
already desperate economic situation. The IMF is effectively setting Ukraine's
policy now, because it is the country's only reliable source of foreign
currency. It needs to focus on preventing Ukrainian politicians from making
stupid self-serving decisions like the ones that caused the hryvnia debacle
and spawned the black market. The Russian-instigated war in the east is not
Ukraine's only problem: When it inevitably ends, bureaucratic incompetence,
plaguing the country's transition to a modern economy, will remain behind.
Carpetbaggers Take Over
The last paragraph above says it all. The only thing I disagree with is the
reference to the "Russian-instigated" war.
Make no mistake, this was a "US-instigated" war. Russia merely
stepped into it, in support of separatists.
The IMF Carpetbaggers have arrived. Total destruction of the country is at
hand.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com