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Cash dollar fluctuations expected after NBU's transition to flexible exchange rate

Cash dollar fluctuations expected after NBU's transition to flexible exchange rate
Author: Maria Kholina

The National Bank of Ukraine's (NBU) shift to a flexible exchange rate regime will necessitate adjustments in the cash market. Significant fluctuations are likely over the next 10-12 days, but this should not be interpreted as instability, according to Taras Liesovyi, the head of the treasury department at Globus Bank.

According to the expert, following the abandonment of the fixed exchange rate and the introduction of a "free" exchange rate on the interbank market, the situation in the cash foreign exchange market will largely depend on the interbank rate.

"In other words, the cash market will strive to react promptly to any changes. At the same time, we understand that the regulator will also closely monitor the situation and prevent any sharp surges or drops in exchange rates; any 'supernatural' excitement will be promptly addressed," Liesovyi stated.

In his view, the cash market will adapt to the new realities over the next 10-12 days, and exchange rate changes may be quite dynamic.

However, there is no threat of destabilization to the foreign exchange market. Liesovyi reminded that all previous steps taken by the regulator aimed at easing control over the currency market have been quite successful. Therefore, the market logically expects that the managed flexibility regime will benefit it, he added.

"It is worth noting that in the early days, exchange offices may see the emergence of 'irrational' rates that do not align with market realities. Therefore, we advise citizens not to rush to buy dollars or euros. The situation remains under control, and there are no global changes in the market for now," Liesovyi said.

The expert also said that the new exchange rate regime is an interim step towards the reintroduction of a floating exchange rate, which will only happen when several economic and political factors align.

"However, the 'free' interbank exchange rate is already a step towards self-regulation in the non-cash market, as the rate will now depend on the balance between supply and demand," added the head of the treasury department at Globus Bank.

Managed flexibility exchange rate regime

On October 3, the National Bank (NBU) of Ukraine introduced a managed flexibility exchange rate regime. Prior to this, since the beginning of the conflict, the NBU had maintained a fixed exchange rate for the hryvnia to the dollar, initially at 29.25 UAH/USD and later, starting from July 21, 2023, at 36.57 UAH/USD.

NBU Governor Andrii Pyshnyi said that this does not mean that the NBU has let the exchange rate float freely. According to Pyshnyi, the key word in the new managed flexibility exchange rate regime is "managed."

After the NBU's decision, the dollar's exchange rate in the cash market increased on October 3 by 25 kopecks to 38.40 UAH/USD.