Issue No. 1 - December 2024

The purpose of this review is to provide an analysis of the current situation on the Ukrainian foreign exchange market and forecast the hryvnia exchange rate against key currencies based on the latest data. We analyze current conditions, key influencing factors and possible scenarios.

Analysis of the current situation

The Ukrainian foreign exchange market is experiencing a growing shortage of foreign currency caused by high demand in both the cash and non-cash segments. The National Bank of Ukraine stabilizes the market with interventions that cannot fully satisfy the demand for foreign currency, but at the same time achieve the goal of stabilizing the market, which prevents abrupt dynamics and allows for a smooth devaluation trend.

The increase in demand for foreign currency in both market segments is typical for the beginning of the month and the end of the year.

Statements and steps taken by Ukraine's international partners to provide further funding from frozen Russian assets, infrastructure support, and economic stimulus projects do not give rise to pessimistic exchange rate forecasts.

However, a change in tax policy, in particular to increase the tax burden on deposit income, could become a powerful new driver of demand for foreign currency and pressure on the hryvnia exchange rate from households, as well as the flow of foreign currency savings from the formal financial system into cash, while banks are unable to offer attractive rates that would offset the risks of new steps of administrative intervention by the state in regulating foreign exchange transactions for households.

A characteristic feature of recent weeks has been the widening of the spread between the buying and selling rates of the most popular currencies among Ukrainians, the euro and the dollar. This indicates that FX market operators are seeking to capitalize on the increased demand for cash currency among households, and the widening spread between the buying and selling rates allows FX market operators to compensate for their own risks amid an unpredictable exchange rate environment.

Dollar exchange rate forecast

Short-term outlook

In the short term, the hryvnia exchange rate will remain in the range of UAH 41.7-42/$, with a tendency towards UAH 42.5/$. Quotations close to 42 UAH/$ were already recorded in early December, which is in line with our exchange rate expectations for the end of this year. At the same time, seasonal factors, such as increased demand for foreign currency at the end of the year, may cause a slight short-term overvaluation - up to UAH 42.5/$.

Medium-term outlook

The dollar is likely to reach UAH 42.2-42.5/$ by the end of 2024, given the traditional increase in demand for the currency in December. Among the external factors, the main one is the monetary policy of the US Federal Reserve, which will affect the dollar's position in the global market, and this will be reflected in the dynamics of the hryvnia exchange rate, which will still drift smoothly to the value of 45 UAH/$, which is the basis for the state budget for 2025.

Euro exchange rate forecast

Short-term outlook

The euro remains under pressure on the international market due to expectations of ECB rate cuts. In Ukraine, this was reflected in the stabilization of the hryvnia exchange rate against the euro at UAH 43.6-44.3 per euro. Given the absence of local drivers, the exchange rate will remain within these limits with a potential slight decline in the near future.

Medium-term outlook

Over the next few months, we expect the euro to gradually rise to UAH 47-48/€, driven by a possible easing of the ECB's monetary policy. However, the euro's strengthening will also largely depend on the success of the eurozone's economic recovery and global trends. The dynamics of the euro against the hryvnia will largely reflect these trends in the Ukrainian market, as there are no internal influential fundamental drivers of the euro exchange rate in Ukraine, only situational ones.

Key factors influencing the foreign exchange market

1. Increased demand for foreign currency: At the end of the year, businesses and households traditionally step up purchases of foreign currency to settle foreign trade contracts and preserve their savings. The market is balanced by a significant sale of foreign currency from savings for celebrations and vacations during the Christmas and New Year cycle.
2. Relatively stable and predictable inflow of foreign currency: proceeds from exporters and aid from partners and allies help to avoid currency shortages and keep the population from panicking, which would be the most destructive driver for the exchange rate.
3. The NBU's monetary policy: continued controlled flexibility of the exchange rate and the use of interventions to contain sharp fluctuations: the situation here depends entirely on the NBU's will to restrain or not to restrain the hryvnia exchange rate, as well as the market regulator's willingness to spend foreign exchange reserves and their sufficiency.
4. External economic factors: US Federal Reserve policy, the economic situation in the eurozone. An additional factor of long-term uncertainty is the likelihood of trade wars and restrictions against China and the EU announced by the new US administration.
5. Tax changes: Increased tax rates on deposit income and business transactions may stimulate demand for cash as households and businesses increase their shadow operations.

Recommendations for businesses and investors

• Short-term strategies: focus on liquidity and use fixed income instruments such as foreign currency deposits or bonds, keeping in mind that a deteriorating economic situation may prompt the government to impose restrictions.
• Medium-term investments: Maintain a balanced currency portfolio with a predominance of the US dollar due to its stability in the international economy.
• Alternative assets: in case of increasing tax pressure and unwillingness to keep savings in risky cash, consider investing in crypto assets as a way to diversify savings and an additional source of investment income.
• Long-term strategy: keep the majority of your savings in foreign currency to protect against the effects of a sustained devaluation trend.

This material was prepared by the company's analysts and reflects their expert, analytical professional judgment. The information provided in this review is for informational purposes only and should not be construed as a recommendation for action.

The Company and its analysts make no representations and assume no liability for any consequences arising from the use of this information. All information is provided "as is" without any further warranty of completeness, obligation to be timely or to update or supplement.

Users of this material should use their own judgment to assess risks and make informed decisions based on their own assessment and analysis of the situation from a variety of available sources that they consider to be sufficiently qualified. We recommend that you consult an independent financial advisor before making any investment decisions.

REFERENCE

KYT Group is an international multi-service product FinTech company that has been successfully operating in the non-banking financial services market for 16 years. One of the company's flagship activities is currency exchange. KYT Group is one of the largest operators in this segment of the Ukrainian financial market, is among the largest taxpayers, and is one of the industry leaders in terms of asset growth and equity.

More than 90 branches in 16 major cities of Ukraine are located in convenient locations for customers and have modern equipment to ensure the convenience, security and confidentiality of each transaction.

The company's activities comply with the regulatory requirements of the NBU. KYT Group adheres to EU operating standards, having a branch in Poland and planning cross-border expansion to European countries.