Daily Insight-Domestic liquidity on the rise; UAH ironically finishes the year unchanged

While FX markets in the West continued the holiday week with thin trading, the hryvnia extended its several day long drift to 8.0/USD, which was eventually reached in intraday trading on Tuesday, but retraced back to 8.04/USD on Wednesday. Ironically, during most of 2012, the market consensus was that USD/UAH would eventually break the authorities\' preferred comfort zone of 8.0-8.1/USD. These expectations peaked at the end of October on the eve of the parliamentary elections, struggling for another several weeks. However, the market pressure receded as the NBU re-implemented the tougher foreign currency regulations that had been in effect in the early 2000s which had been relaxed in the boom years of 2005-07 to relieve the pressure on the UAH to strengthen versus the USD as foreign capital poured into local commercial banks. On top of this, a verbal intervention, by way of a threat of a 10-15% tax to be imposed on every frequent trader\'s cash operation on selling USD to obtain UAH, was staged to calm both the public and active traders in the cash USD/UAH market. The FX market appears to have stabilized as the USD/UAH rate returned to 8.0/USD as 2012 comes to an end. Most forecasters, including ICU, did not expect this. Next year is promising to be equally intriguing and ironic. Our forecast now is based upon the resumption of IMF lending, setting the conditions for the FX market to be a bit more flexible as the weight of the twin deficits (both the state budget and the current account deficit) play in favor of weaker UAH. We predict 8.75/USD for the 2013 average and 9.0/USD for the 2013 year-end rate.
Attached please find the complete report, which includes supporting charts and tables for all comments (PDF file: 9 pages, 569KB)