Ukrainian FX in freefall versus peers

Upon close analysis of available data from the BIS and ICU on all international FX movements since the mid-1990s to determine any similarities in the UAH's recent sharp nosedive (in terms of nominal and real trade-weighted indices), we discovered the following:

Peers that experienced nominal year-on-year declines of 50-60%. The Ukrainian hryvnia's recent FX rate freefall is similar to FX crises in the 1990s that occurred in Turkey (January 1995), Venezuela (September 96), Romania (March 1997) and Mexico (November 1995). See Chart 1-Chart 37 on pp.2-13.

History has shown more severe freefalls of 70-90%. In 1997 Bulgaria's currency declined 96% in year-on-year terms if measured by its nominal trade-weighted index. Brazil's currency dropped 84% in 1995, and Indonesia's currency collapsed 80% in 1998. Russia suffered a 75% year-on-year decline at the peak of its economic crisis in 1998, which dragged down Belarus's currency by 75% in 1999. Finally, during its crisis in 2002, Argentina's currency plummeted 72% in year-on-year terms.

Peers that experienced milder declines of 30-45%. Kazakhstan in 2000, and South Korea and Thailand both plunged into crisis in the late 1990s.

Nations with prudent macro stories. Most nations that have their own currencies (unaffiliated with currency union memberships) have adeptly engineered their macroeconomic policies to avoid changes in nominal trade-weighted values of their currencies in excess of 30% (by appreciation or depreciation). Canada and Chile are two prime examples. In terms of real trade-weighted values, the prudent boundary is closer to 20%.

In the aftermath of the crisis. Chart 4 and Chart 5 on p.5 illustrate that, following the peak of the crisis, there is normally a period of stabilization of the nominal trade-weighted rate occasionally recoveries. However, there are exceptions. Turkey's currency declined further, albeit at a much slower pace, following the peak of its crisis. Macro stabilizations differ by country and circumstance.

Ukrainian hryvnia's outlook. History shows that FX markets will try to test new FX rate lows unless policymakers implement wide-ranging fiscal and monetary actions at the currency's trough. In Ukraine, several coalition political parties have sought the advice of private sector patriarch economists to determine the action plan in the wake of hryvnia freefall. Yesterday's decision to move the date of parliamentary review of the IMF-required laws from March 3 to March 2 is such a sign. While we expect additional wide-ranging measures to follow soon, if immediate changes are delayed, in particular for the implementation of natural gas and utility tariff increases and for the resolution of the banking crisis, the hryvnia could test new lows.

Источник: ICU