BOJ mum on mid-December foreign exchange market manouevre
The Jamaican currency topped $115 to the US dollar at midweek, continuing its steady drift since November when the pace of depreciation re-accelerated relative to its performance over the summer and into early fall.
Still, for calendar year 2014, the local currency lost less than eight per cent of its value to settle at $114.66, compared to the 14 per cent deprecation in 2013.
The Bank of Jamaica's (BOJ) senior deputy governor, John Robinson, attributed the slowdown in depreciation to increased confidence in the economy as well as weaker demand for foreign exchange during the pre-Christmas period.
"As confidence builds ... and as the economy resumes growth, I think there will be less anxiety about currency substitution, less hedging, and you will begin to see the benefits all around as time passes," Robinson said.
However, analysts to whom the Financial Gleaner reached out for comment said the BOJ's return to the market at the tail end of the year appeared to have sped up the dollar's fall in that period.
The summer lull in the market followed the successful float of a US$800-million global bond by the Jamaican Government last July.
Six months later, local treasuries manager and forex traders say demand for foreign exchange is sustained and rising.
Evette Bryan, manager treasury & trading at Victoria Mutual Wealth Management Limited, said that in addition to the usual heavy demand from the manufacturing and energy sectors, clients are showing a preference for savings in US dollars - "What some might refer to as portfolio shifting," she said.
Foreign exchange transactions for calendar 2013 amounted to US$7.5 billion, with an uptick to US$8 billion in 2014, based on BOJ data, she said.
The central bank intervenes in the market from time to time - that is, it sells currency to its primary dealers for resale to end users at a stipulated price, or it may buy up excess foreign currency - to stabilise the local dollar.
Bryan said the BOJ intervened consistently between April and June 2014, which "helped to create some confidence and stability in the market" and resulted in a slight appreciation of the Jamaican dollar in August and September.
The central bank intervened again in October to purchase US dollars from the market, following which "we noticed the resumption of depreciation of the JMD versus the USD," she said.
A Financial Gleaner source also said the October intervention resulted in some speculation and a shift in market sentiment.
It was followed up with another unusual move, described by our source as "an unprecedented offer" by the central bank, on December 19.
The BOJ offered US dollars to dealers at a rate of J$114.5813, but this time it did not stipulate the sell rate nor a restriction on resale to end users.
"Resale recipients were also not restricted. I have never seen it happen before and other brokers have said the same. But from what I requested I got less than a third," said the treasury expert, who operates from New Kingston.
"The rate of depreciation has speeded up since the intervention," the trader said.
The Jamaican dollar depreciated at a pace of 0.08 per cent in the month of October. The pace of decline accelerated to 0.73 per cent in November and 0.95 per cent in December, according to Financial Gleaner estimates.
The BOJ has not returned to the market since December, traders said.
It's unclear whether the BOJ intends to maintain this new mode of intervention or even what market conditions triggered the shift in the first place.
Robinson reverted to BOJ-speak when asked about the December 19 foray, saying: "The bank remains committed to the maintenance of a flexible, market-determined exchange rate and will act to ensure that orderly conditions prevail in the foreign exchange market at all times."
However, the central banker also said current market conditions indicate that there is no shortage of foreign exchange.
"In these circumstances, there is no need for the bank to place limitations on the use of funds sold to the market and which serve to segment the market among different types of users," he said.
Bryan of VM Wealth said her analysts had observed no negative changes in the fundamentals of the market, but have detected a decrease in market sentiment towards the JMD.
But she adds that falling oil prices may eventually arrest demand, and check the downward drift of the currency that has continued into 2015.
Robinson says that, overall, there is less anxiety in the market to build up foreign exchange balances.
"So you saw, as a result, a fairly extended period of stability in the exchange rate. What you are seeing since November should not alarm anybody," said the senior deputy governor.
"I think what we need to look forward to is a longer horizon. People need to focus more on investments. We would like to see the confidence that is expressed by businesses in surveys, in their own utterances, being reflected more strongly in real sector investments," he said.