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Devaluation "jump" of tenge is accomplished fact. What's next?

06.10.2017 Almaty. October 6. KazTAG - Sergey Zelepukhin.A number of statements have been made recently saying there are no prerequisites for the weakening of the national currency in Kazakhstan, while all the disputes around it are groundless rumors. However, at the same time, the fact is that devaluation of the national currency is an accomplished fact. And the latest decision of the FED gives a new basis for further gradual strengthening of the American currency.

Devaluation walks around the country

Let's not be unfounded, but turn to the statistics of the rates dynamics of the dollar to tenge over the past few months. It clearly shows that another devaluation of the national currency has already occurred.
While on May 30 of this year the exchange rate of the US dollar was T310.40 per $ 1,  by the results of trades on the Kazakhstan Stock Exchange on September 25 it reached T341.27. That is, for the last 4 months the national currency has weakened by more than T30. And only since the beginning of September the dollar has strengthened by almost T7, whereas during three months of summer its rate has grown by almost T25, as of August 31 the rate was T334.70 per $ 1.

If this is not a devaluation, then what is this?

However, for the sake of justice, it should be noted that before getting back under pressure, since December last year till May 30, 2017 the national currency had strengthened by approximately same T30. However, this does not abolish the fact that after this tenge surrendered its positions again.

Therefore, all the disputes about the fact that there is no ground for devaluation contradict reality and are nothing but another attempt to calm down the population.

But we have already gone through all this. Back in April 2015, official statements also said that there is no reason for devaluation and that the transition into an inflation targeting policy would be implemented within the next 5 years.

However, everyone knows what happened next: on August 20, 2015, the Government announced introduction of free floating exchange rate and transition into the inflation targeting policy, after which,  the national currency declined by more than 100% paired with the dollar within 6 months.

Of course, today there are no prerequisites for a 100% decline of the national currency: oil price, in particular, Brent, resumed growth and already surpassed $ 57 per barrel. Against this background, the Russian ruble shows steadiness and even somehow oppresses the positions of the US currency. By trade's result last Friday, dollar-ruble rate declined to 57.4 rubles.

It may seem that in this situation, the dynamics of tenge rate looks illogical - oil prices are rising, ruble is strengthening, while the national currency is gradually declining. But this is caused by increased demand for dollars by the banks. According to some expert estimates, it is due to completion of operations by second tier banks on currency swaps with the regulator. That is, banks continue to return the currency previously borrowed from the National Bank and, as a result, there has recently been an increase in demand for dollars and weakening of tenge.

However, since these operations are of a short-term nature, this factor of pressure on tenge will stop being effective in the near future. Therefore, it is possible that in the near future there will be some recovery of the national currency against US  dollar.

What will give "strength" to dollar?

However, in the medium and long term, there is a high probability that dollar will continue to gradually strengthen not only in respect of commodity currencies, but also against  the currencies of developed countries.

The point is that following the meeting of the Open Markets Committee of the US Federal Reserve System  on September 20-21, a decision has been made that will play in favor of the US currency for a long time.

Despite the fact that this time  FED did not raise the base rate, leaving it at the same level of 1-1.25%,  it took another important decision. The American regulator intends to gradually reduce the balance of its assets in the form of treasury bonds and other securities, which now amounts to an impressive $ 4.5 trillion.

In other words, FED plans to sell its assets. Each month, since October this year, the US monetary authorities will sell $6 billion in treasury securities and $4 billion in mortgage bonds. In the future, according to the American regulator's plan, the sale of securities will be increasing by another $ 10 billion every 3 months until the sales volume reaches $50 billion per month, and the balance of FED assets lowers by $1 trillion or more in the coming years.

The meaning of FED’s actions is quite obvious. The regulator intends to withdraw huge dollar liquidity from the market, which has been "pumped" into the economy since the beginning of the crisis year of 2008 with the help of a low base rate and so-called quantitative easing programs (purchase by the Federal Reserve System of treasury and mortgage bonds on the market). According to experts, as a result of these measures,  since 2008 till 2014 more than $ 3.5 trillion were injected in the economic and financial system of the United States.

Obviously, the withdrawal of dollar liquidity from the market will play in favor of the US currency, but do not expect a sharp rise in the dollar rate - its strengthening will go gradually during several years. And the whole point is that the volumes of liquidity that FED  intends to "pump out" from the market every month is a drop in the bucket compared to the total amount of dollars injected into the economy and the US financial system by the American regulator in previous years.

Therefore, strengthening of the dollar will occur gradually, as well as weakening of other currencies, including  tenge, along with FED measures and relatively small monthly liquidity withdrawals, capital outflow from emerging markets will go slowly.

However, as for tenge,  oil prices will play an important role, which in case of further growth can partially offset the effect of dollar strengthening due to the measures taken by the American regulator.

Nevertheless, in the medium and long term,  dollar has good chances to become even stronger to tenge. At the same time, it cannot be excluded that the national currency in the short term will win back some of the lost positions. But for this it is necessary that oil prices remained at the current level, while Russian ruble continued to demonstrate stability in tandem with dollar.