Weekly Forex Review (07/31/2023-08/04/2023)

The tenge exchange rate has been at the level of 445.3 tenge per dollar for several weeks in a row. Such dynamics of tenge are due to the high base rate, which creates a high demand for tenge-denominated investment assets. Additional demand for tenge is provided by currency conversions by the National Bank to ensure transfers from the National Fund, as well as the conversion of foreign exchange earnings by quasi-public sector entities.

The Dollar Index exceeded 102 points for the first time since the beginning of July. At the same time, the Index value practically did not react to the Fitch's downgrade. Economic agents are reacting more to the data on the US economy, which continues to strengthen and works towards the Fed's policy to continue raising rates. The number of jobs for the month increased by 324 thousand people, which is significantly higher than the expectations of market participants (189 thousand people). Unemployment rate is falling by 3.5% with a forecast of 3.6%.

The oil price remains high and it rose to $ 86.24 per barrel by the end of the weel. Such dynamics of tenge are explained by a reduction in oil output and reserves. Saudi Arabia has announced the extension of an additional reduction in oil output by 1 million barels per day. At the same time, OPEC+ is reducing oil production by 2 million barrels per day by the end of the year. Commercial oil reserves in the United States decreased by 17 million barrels with a forecast decline of 1.4 million barrels.

The ruble accelerated its decline against the dollar last week. This weakening is due to a reduction in export earnings, the outflow of foreign capital and high demand for foreign currency. An important factor is the influence of the modified budget rule, according to which earlier at low oil prices the Ministry of Finance of the Russian Federation sold currency and bought rubles, which supported the demand for Russian currency. In conditions of high oil prices, the volume of foreign currency sales and, accordingly, the support of the ruble decreases. The weakening of the ruble exchange rate leads to cheaper goods from Russia and leads to an increase in imports from Russia to Kazakhstan. However, the growth of purchases of goods from Russia over a long period leads to a gradual adjustment of the ruble to the tenge exchange rate.

According to our forecasts, the strengthening of tenge is due to the influence of transfer factors, mandatory currency conversion by quasi-public sector entities and high demand for tenge assets. We expect a correction of the exchange rate as the date of the NBK meeting approaches, where the regulator at the last meeting signalled a possible reduction in the base rate. Given the above factors, we expect the exchange rate to be about 448.8-456.5 tenge per dollar.