Foreign exchange market reflects economic imbalances

On April 5^th, the National Bank has published March 2013 foreign exchange market data.

Despite the negative trends in the international trade in goods, the foreign exchange market experiences growing foreign currency net supply from individuals and businesses. The situation is caused by the prevailing interest rates in the banking system. When the existing distortions in interest rates are eliminated, the net foreign currency supply by individuals and businesses will become a net demand.

Published international trade in goods and services data for February 2013 showed deterioration in foreign trade. In January, the international trade in goods and services was plus USD 127.9 million, in February – plus USD 63.6 million. Trade balance does not include fees listed in the Russia’s budget for oil products produced from Russian oil. Such transfers make over USD 300 million monthly. Therefore international trade is not the source of positive currency supply at the foreign exchange market.

The excess supply of foreign currency in the foreign exchange market is caused by the distorted interest rates in the banking system. The BYR deposit market offers individuals interest rates 35% pa and higher. Against minor national currency fluctuations, incomes from deposits are higher than the majority of investment offers available to individuals. In March 2013 the population broke the overall record for funds deposit in banks in local currency. In order to put money in national currency in banks, the population sells the available foreign currency savings.

Businesses use the situation with low interest rates on foreign currency loans against high interest rates on ruble assets. They receive foreign currency loans and exchange the foreign currency into rubles, which they use for current operations. This mechanism enables them to reduce the loan’s maintenance costs.

The National Bank aims at reducing interest rates on national currency loans, which will result in lower interest rates on national currency deposits for the population. When the gap between loans’ interest rates in national and foreign currency shrinks, businesses will prefer to increase borrowing in local currency and reduce their foreign currency risks.

Thus, the period of relative prosperity in the forex market is coming to an end. Depending on the pace of the discount rate’ reduction, the currency market situation will shift from surplus to deficit.