Fri | Dec 2, 2016

Bank of Jamaica watchful as JMD rises in value

Published:Thursday | April 2, 2015 | 12:00 AM
John Robinson, Senior Deputy Governor of the Bank of Jamaica.

that we want to promote," said Robinson.

"As you know, one of the adjustments that is seen as being important to stimulating growth is an adjustment in the exchange rate to make exports more competitive, and that has been something which has been occurring over the last two years or so," he said.

The central banker said the appreciation of the JMD was due to a fairly sharp fall-off in demand for the USD at the same time that supplies of the hard currency have improved. Indeed, the BOJ itself has been buying up excess supplies, Robinson disclosed.

And, with a watchful eye on conditions in the market and the movements in inflation, the central banker, while he emphasised that he was not telegraphing any imminent action, said adjustments to BOJ's policy rate may be among the considerations for action.

Asked whether the adjustment of the central bank's market intervention strategy may have had an impact on the currency, Robinson said he was not prepared to make a direct link between them.

On several occasions since mid-December, the BOJ has sold USD into the market without restriction on end-user transactions. It typically sets the price to its primary dealers and usually specifies that the funds be sold only to manufacturers and others with US dollar bills to pay.

"We did go through a period where the funds offered to the market was done without the additional restrictions for end-user purposes. That did help over that period to settle the market when there was a surge in demand," said the senior deputy governor.

"The fact that the surge was satisfied may have contributed to people building positions which became longer than they traditionally would, and would have allowed them in this period to just relax those positions with less anxiety," he posited.

Gregory Samuels, assistant vice-president and head of treasury and trading at Scotia Investments Jamaica Limited, said Monday that he believed a "main" contributing factor was tax obligations.

"Because of these huge payments there is a high demand for J-dollars, so persons with USD would sell to get the J-dollar to make those payments; and, similarly, if you are a bank, the corporate companies will be pulling money from you, so the banks themselves would need liquidity and the only way to do that is to sell the USD to make those payments," said Samuels. "These are the main contributing factors, I would say, to the revaluation."

no shortage of forex

Robinson said the central bank has noted "a fairly sharp fall-off in demand from people who may have been hedging and from people who may have been just holding long positions in foreign exchange, as well as an increasing supply from tourism, from remittances, and so on".

Consequently, he said, BOJ's reserves have been growing and that there is no shortage of foreign exchange. The fall in demand for foreign exchange year-over-year is approximately 10 per cent, while supplies are up by about the same proportion, he adds.

"There is less stress for those who need and there is less ease for those who sell foreign exchange to demand higher prices," the central banker said. "As a result, people who demand forex have been able to secure it at lower rates. We ourselves have been buying, as people who want to reduce their positions find it convenient and perhaps easier to sell us the excess that they have."

The net international reserves rose by some US$136 million from US$1.78 billion in January to US$1.92 billion in February, but is still below the US$2-billion mark hit in December. Robinson said the recent increases have come from the BOJ's regular open-market issues of certificates of deposit, as well as cash purchases from institutions that "find themselves holding more dollars than they want".

Samuels of Scotia Investments also linked the appreciation of the dollar to rising confidence in the economy, saying the macroeconomic picture "has been good in terms of the country passing IMF tests", while the drawdowns from the multilateral under the reform programme have shored up the reserves.

"That sort of sent a positive signal into the market that the central bank can defend the dollar. The seventh test is pending but, unofficially, we know that they passed it. It's money in the pipeline, as well as the last drawdown which was used to shore up central bank reserves and send a positive signal," said the trader.

"The main factor, however, is the seasonality for tax payments," he reiterated.

The International Monetary Fund announced Monday that the agency's board had approved an equivalent US$39-million drawdown for Jamaica for passing the seventh test.

Asked whether investors/ businesses were likely to build back their US positions after tax season, Samuels said no one could say for sure.

"The general trend has always been that the dollar itself, notwithstanding any shocks, has always depreciated against the US dollar - about 6.5 per cent per year," he said. "One view is that in order to keep pace with US inflation - our main trading partner - you would expect the dollar to depreciate in the range of five to six per cent each year," he added.

need to maintain

an adjustment

Robinson noted that even though local inflation has fallen quite sharply, it is still well above levels in the US and other major trading partners, so "there is a need to at least maintain an adjustment in the exchange rate which reflects that," he said.

Jamaica has experienced four straight months of deflation. Annual inflation has fallen to 4.5 per cent as a result. US inflation was 0.8 per cent at calendar 2014, and has fallen to zero in February 2015.

The deputy governor said BOJ is monitoring the market and will make interventions and adjustments, as necessary, should the Jamaican trend continue.

"Clearly, this kind of additional demand for Jamaican dollars versus the US would certainly open up more options for us in terms of adjusting our interest rates, our instruments, that can influence monetary conditions locally," said Robinson.

"I am not telegraphing anything, but it's clear to everybody that things are less tight in terms of foreign exchange and, therefore, opens up more options for us as inflation continues to fall," he said.

The central bank last adjusted its policy rate to 5.75 per cent in February 2013.

avia.collinder@gleanerjm.com