TOPIC OF THE WEEK: Does the Uzbek sum's appreciation have legs?
The Uzbekistani sum has generally been the weakest currency in the CCA region for many years for reasons related to powerful underlying relative price movements that have dominated the sum's movements since the opening of the economy in 2017. Hence, any episode of a more sizable strengthening of the currency invites questions and speculation about its driving forces and the longevity of that move.
The most recent appreciation, which took place from May 23-Jun 3, 2024, led to about a 1 percent gain against the US$. What made this even more interesting is that, until recently, the authorities had to explain why the sum was actually losing ground against the US$ faster in the beginning of this year than in previous one. We explore three theories about the sum's unexpected strengthening, including the country's improving trade position, larger inflows on the financial account and considerations related to authorities' desire not to allow a large move in the real effective exchange rate.
In our view, the last one has most appealing features. The events of the last Aug, when the sum was devalued against the US$ in order to reflect "significant devaluation of the national currencies of the main trading partners", is a prime example of the sensitivity of the authorities to changes in the key UZSRUB rate. At that time, the weaker RUB led to an unwelcome appreciation of the UZS, and the authorities responded by devaluing the UZS vs the US$ in an attempt to stabilize the real effective exchange rate. This time, the May strengthening of the RUB vs the UZS has now caused the opposite reaction, whereby the authorities have allowed for the UZS to appreciate vs the US$.
This was only a temporary development, and there are already signs that the sum is reverting to its steady longer-term weakening trend.
Now read on...
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