USD/KZT Exchange Rate Overview
Background for Appreciation
Since the end of October 2023, tenge affected by increased volumes of USD sales from the National Fund began its appreciation until mid-May. During this period of time, the national currency strengthened by 8.3%, while oil fell by -4.4%, which prevents it from being an exogenous explanatory factor in forecasting the USD/KZT exchange rate.
In general, such external factors as oil, the Russian ruble and the US Dollar Index (DXY) have weak correlations with values ranging from 0.45 to 0.52 during the period from 2018 to 2023. At the same time, if we take the period from the beginning of 2023, the ratio slightly decreases, especially with the ruble and the US Dollar Index.
Currency sales from the National Fund are considered to be the reason explaining stable tenge for the last six months. Tenge started to strengthen in late October amid a 1.5 bn sales of US dollar. In June, there was a significant decline in the currency sale volumes, which led to the beginning of tenge weakening. In July, it is planned to sell currency in the range of 450-550 mln, which suggests a probable pause in weakening of tenge.
Thus, when forecasting the exchange rate, the impact of external factors such as oil, US Dollar Index and ruble decreases, and dependence on transfers to the budget increases.
The market forward-looking indicator, which can give further short-term movement of tenge, is the yield on Repo agreements. When the TONIA indicator yield grows, reduction in market liquidity is observed, which is presumably used to purchase either government bonds or foreign currency, resulting in weakening of tenge. This indicator has a short-term effect, and we saw the same thing in late June, when repo yields rose sharply from 13.51% to 15.08% and affected the further weakening of tenge.
Conclusion:
Strengthening of fundamentally weak tenge with negative current account balance did not reflect the equilibrium values of the domestic currency. Sharp depreciation of tenge at falling currency sale volumes from the national funds is a natural factor. Now the exchange rate has reached KZT 480, while for the first time in two years the current account has become positive and is in surplus ($1.8 bn in Q1 2024).
We believe that KZT 480 per US dollar is an attractive level for market participants to sell the U.S. currency if the external environment remains favorable (oil prices) and the current budget policy continues (transfers from the National Fund), there is a likelihood that the exchange rate will set back to KZT 475-465.
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