Ukraine's central bank is shortly expected to either widen or scrap the hryvnya trading band of 1.80-2.25 to the U.S. dollar.
The range originally was set to last through the end of 1998. But the hryvnya hit the upper level of the band on Friday.Although the move is due to the sweeping Russian financial crisis, the hryvnya is not expected to fall dramatically, as there are few factors that really put pressure on it.
The central bank will simply have to widen the band or scrap it amid mostly psychological pressure that comes from neighboring Russia.
One of the major factors that does have some influence is foreign trade with Russia, Ukraine's largest single market. About 32 percent of Ukraine's exports go to Russia.
But half of these exports are barter deals where the exchange rate does not matter much, while another big chunk are services provided for shipping Russian natural gas, oil and ammonia to the European markets and are charged in U.S. dollars. Officials said that only a quarter of Ukraine's exports to Russia are really subject to ruble devaluation shock.
Ukraine's central bank had so far lowered the hryvnya by 4 percent against the U.S. dollar on trade concerns in reaction to the ruble 11 percent devaluation two weeks ago. However, the 4 percent plunge does not incorporate the recent plummet by the ruble.
The hryvnya closed on Friday at 2.2500 to the dollar, compared with the previous close of 2.2496. The interbank market is almost nonexistent today, with sporadic transactions ranging between 2.6 and 2.8 to the dollar.
Most analysts agree that in an optimistic scenario, the central bank will set the new upper level of the band at 2.50 to the dollar, while pessimistically it may be 2.80 or even as high as 3.00.
However, the hryvnya's immediate fall is not expected to be a dramatic one as there are few factors really putting pressure on amid the Russian crisis, besides the obvious psychological one.
Foreign investors own about 1.8 billion hryvnya worth of T-bills, or less than 18 percent of the country's outstanding T-bills. That's why their withdrawal from the market should not cause major pressure.
But major domestic banks formed a syndicate last week supporting the government and agreeing to swap their short-term T-bill holdings into long-term papers. Domestic banks own about 2.5 billion hryvnya worth of T-bills.
Ukraine's banking industry does not have a large exposure to the Russian market.