Default talks bring volatility at the FX market

UKRAINE - In Brief 09 Jul 2015 by Dmytro Boyarchuk

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In early July serenity at the FX market was finally broken. The first disturbing signal came from black market few days ago when foreign currency operations’ spread started widening. Finally yesterday official market also reflected the tendency: on July 8th sell bids on cash operations moved to near 24 hryvnia per $1 vs. 22 hryvnia per $1 over the last few months. Why did it happen? Permanent talks in media about potential default of Ukraine and recently announced default of Greece brought nervousness and are seen as the main trigger for the trend. Important, strengthened demand for foreign currency through summer period is not usual for Ukrainians which means that people indeed became scared after all the messages about defaults. We believe so far news from China does not affect internal market; however, the reaction will arrive sooner or later. In this context we one more time want to emphasize that all talks about readiness of the authorities to stop payments on external debts and announce default do not look really serious. Ukrainians usually do not go deeply into details of talks with creditors but they consider default as total crash of everything. Finance Ministry is trying to run information campaign with explanations on the issue. However, even well-informed Ukrainians consider that in this situation it is better to start purchasing foreign cash (read - arrange new speculative attack) since others will do it anyway (a kind of Prizoners' dilema). Probably, if Finance Minister starts preparing public opinion a year ago, there could be a chance to play default scenario. At this stage playing hard against creditors does not look politically feasible.