BOJ hangs tough on forex rate, endorses forward market
The Bank of Jamaica is for the use of forward contracts to lock in the price of hard currency today for future delivery, saying it gives certainty to businesses that have future foreign exchange obligations to fulfil.
That certainty is now being tested with the Jamaican dollar at an all-time low against its main trading partner.
However, the central bank is holding to its position that market forces are driving the foreign exchange rate and is not inclined to introduce any measures to counteract it, even in the face of the steep drop in the value of the Jamaican dollar in recent weeks.
About 25 per cent authorised dealers, that is, licensed deposit-taking institutions permitted by the BOJ to deal in the business of buying and selling foreign exchange, currently offer forward contracts to their clients, said BOJ Senior Deputy Governor, John Robinson.
There are only 11 deposit-takers, which means that only about three offer the facility. However, Robinson says any of the BOJ's authorised dealers can offer the facility to clients, if they choose.
The Jamaican dollar last traded at $135.54 per US dollar. It's fallen by $10 year to date from $125.0004 at the end of 2017.
Amid that downward spiral, elements of the business community have been whispering that the central bank was considering opening up the market to allow companies to walk into their banks and 'pre-buy' currency.
However, Robinson told the Financial Gleaner that forward buying, although limited in its application, is not new to the forex market.
"When a dealer enters into a contract to deliver foreign exchange to a client on a specified future date, the price they agree on will normally reflect the cost to the dealer of acquiring the funds immediately, plus the net interest cost of financing the acquisition and holding the funds until delivery," said the central banker.
The prices, he added, vary by client and by dealer.
"Bank of Jamaica endorses their use as a means of giving more certainty to businesses that have future obligations in foreign exchange as to what the Jamaica dollar equivalent will be on the date of settlement," he said.
BOJ is seeking to develop a standard reporting format for those transactions so that they can form part of the regular reports the central bank makes to the public.
"Discussions of developments such as these take place at monthly meetings of a foreign exchange market development committee chaired by the bank with broad representation from earners and users of foreign exchange as well as financial intermediaries," Robinson said.
"It was created to facilitate consultations about market activity and development and has been working well," he added.
Authorised dealers and cambios do not require the authorisation of the BOJ to offer forward contracts, nor is their any limitations on the size of the contracts, but the central banker said the process is not fully transparent.
"So what we are trying to do is to agree a method of reporting so that anybody who wants to know what are the going rates, who is dealing, where they can get such a contract, they can just pick up the paper and see it," he said.
The BOJ is still to determine the frequency of the report, whether weekly or daily, but it would identify the amounts sold in the forward market and the range of rates offered on those transactions.
The foreign exchange rate has been wont to move up and down since the central bank ended its market interventions and introduced a new system called the Bank of Jamaica Foreign Exchange Intervention Trading Tool, BFXITT, that is meant to deliver a cleaner market-determined exchange rate.
The BOJ provided a chart -- see graphic on this page -- of daily activity that shows a pattern of two-way movement in the forex rate over the past year, "with discrete episodes" of appreciation and depreciation.
"In the bank's view, this is a deliberate and desirable outcome of competitive trading in circumstances where demand and supply of foreign exchange for current account transactions are broadly in balance and where the bank provides a mechanism to alleviate temporary mismatches," said Robinson.
"In the very recent past where the rate has been depreciating, there is evidence of increased demand as reported by dealers and evidenced by the willingness of users to pay higher prices," he said.
That demand has come from various sectors, including telecommunications, distribution, manufacturing and energy.
According to the BOJ's trading summary, foreign exchange valued at US$59 million and US$53 million, respectively, was bought and sold on Monday, July 30. On that day, the highest buy rate was $137.25 and the highest sell rate $144.
That contrasts with the US$38.78 million and US$42.18 million in the value of the foreign exchange bought and sold on the day the average selling rate of the US dollar peaked last Friday. On that day, the highest buy rate was $136.80 to US$1, while the highest sell rate was $143.52.
"Increased demand in the market is also being influenced by anxieties about the rate movement which has led some businesses to acquire foreign exchange ahead of their immediate needs," the central banker said.
Similar expectations about the rate have also resulted in earners and suppliers of foreign exchange either postponing sales or insisting on higher prices.
"As the chart shows, these episodes are short-lived and will be always be circumscribed by Bank of Jamaica's ability to quell disorderly conditions if they arise," Robinson said.