Wynter goes to bat for B-FXITT - Calls it a work in progress; additional controls pending for forex traders
The timeline for introducing the second component of the new foreign exchange trading tool, known as B-FXITT, to allow for the purchase of currency is yet to be determined, even as central bank chief Brian Wynter touts the initial phase as working as intended.
B-FXITT was introduced by the Bank of Jamaica (BOJ) in July as a new tool to manage the foreign exchange market, but for now, it only allows for the supply of currency to the market by the central bank, which auctions millions in hard currency on a weekly basis.
The BOJ also intends to buy foreign exchange from its dealers, eventually.
"It will be introduced when the design is complete and when the market is ready for it," a BOJ source said on Wednesday, when pressed about the schedule for purchases to begin.
That same day, BOJ Governor Brian Wynter told businesses that "B-FXITT is still a work in progress", but he also noted the system has allowed the central bank to upgrade and refine its foreign exchange trades with authorised dealers and cambios.
"For you, the end user, it delivers a more transparent and efficient market that more accurately reflects true market conditions," he said at the forum convened by the Jamaica Chamber of Commerce.
Under B-FXITT, dealers are advised "up to four weeks in advance" of the funds to be auctioned by the central bank. The rates are set by the bidders.
Under the intervention system it replaces, classified as a managed or dirty float, the BOJ would often stipulate the rate at which its dealers sell to end users, and there was short notice on when the central bank would buy or sell currency on any given trading day.
Controls in place for equal access
With B-FXITT: "There are controls in place to ensure equal access for all qualified intermediaries, such as the maximum aggregate bid per dealer of 20 per cent of the offer size. This limit helps to make smaller dealers and participating cambios more competitive, and puts pressure on larger institutions to improve their margins and the quality of their service in order to keep their market share," Wynter said.
"Additional measures will be implemented to improve the service delivery of dealers to end users, including limits on the size of open positions dealers are allowed to take and the adoption of a foreign exchange market code of conduct governing the behaviour of intermediaries with their customers," he told the forum.
In an interview that predated Wynter's appearance at the forum, Julian Mair, group chief investment strategist at JMMB Group and former president of the Jamaica Securities Dealers Association, said the results of the first nine auctions under B-FXITT might be indicating the need for an overhaul to make the auction results less predictable, and to increase the volumes of currency auctioned by the BOJ that better aligns with demand.
The BOJ, for its part, said at the launch of B-FXITT that prior levels of foreign exchange demand might have been artificially inflated as institutional buyers took advantage of a flawed system.
Further, IMF Resident Representative for Jamaica Dr Constant Lonkeng Ngouana commented to the Financial Gleaner that the new system is set up for interbank trading, not for the BOJ to match all of the market's needs.
Lonkeng said dealers should be looking to trade currency with each other, rather than rely solely on the BOJ.
Between August 2 and October 19, the BOJ auctioned US$170 million. Bids, however, totalled US$399 million, which meant that more than half the demand was unsatisfied.
Comparatively, in last year's September quarter, pre-B-FXITT, the central bank sold US$224 million into the market.
Still, Wynter said that within the foreign exchange market itself, trading volumes have been rising and is now at around US$40 million to US$50 million daily. He did not offer comparative numbers.
"Unsurprisingly, as with any poorly understood new thing, B-FXITT has been praised for the bouts of appreciation and vilified for periods of depreciation. However, B-FXITT only augments supply or demand in order to reduce episodes of disruptive volatility," the central banker said.
Those who continue to bet that the dollar will continue to lose value are likely to be penalised by the market, he warned.
"Speaking of disadvantaging those who make poor decisions, during the month of May this year, before B-FXITT was introduced, BOJ intervened in the market with sales of US$240 million, despite all indications that there was adequate supply," said the BOJ governor.
"We sold those funds at over $130. Perhaps you heard about this. We bought back most of it in the months that followed and at cheaper rates, closer to $129. Someone lost millions of Jamaican dollars on a bad bet, but I would not be surprised if you never heard about that," he added.
Performance not different
Mair says the performance in the market is no different under B-FXITT in respect of volumes traded.
"This has always been the case. The local market trades millions of USD on a daily basis," he said.
In the first three months of B-FXITT's introduction, July 1 to September 30, the Jamaican dollar depreciated by 1.09 per cent against the US dollar, moving from $128.50 to $129.91. Comparatively, the dollar depreciated 1.91 per cent in the same period in 2016.
Mair considers the long notice period for B-FXITT auctions to be a weakness of the system.
"This adds to the predictability, which, in the case of heavy market demand and limited committed supply, has driven the rates higher and a faster pace of devaluation than would have occurred otherwise," he said.
"Unpredictability with regards to volume and rate was recommended by the market as a necessary tool to keep investor behaviour [in check] in both directions."
Instead: "B-FXITT has been introduced with certainty to insufficient supply and certainty of selling to the highest bidder, both of these factors lead to a one-way bet," he added.
The volumes sold under 12 auctions to date amount to 42 per cent of total bids. Mair predicts that the consistent undersupply will affect the value of the dollar.
Wynter himself is touting the falling pace of depreciation in the one-year period ending September, at 0.4 per cent, relative to seven per cent the year before.
The Jamaican currency went through a period of revaluation recently, but the strategist
said that was due to a one-time event involving the portfolio repositioning of one financial institutional, which sold large quantities of currency to the market.
Other stakeholders have declined to pass judgement on B-FXITT, saying its early days yet. Managing Director of JN Bank Maureen Hayden-Cater said the central bank continues to hold discussions with commercial banks and other players in the market to ensure the new tool meets its desired objective of a stable foreign exchange market.
Wynter indicated that B-FXITT is meant to curtail the BOJ's heavy influence on foreign exchange trading, allowing the system to operate more in line with a free market.
"A buyer or seller must be able to do the transaction that they want,, when they want to, and in the amount that they want - in other words, it must be liquid. And he or she should leave the market having done a transaction with confidence that it was done at a fair price - in other words, price discovery," he told Wednesday's forum.
"This is quite a change from the past, as Jamaicans have become accustomed to viewing the exchange rate as a subsidised public good, instead of the fair market-determined price of the foreign currency that is available in the country," the BOJ governor said.