Mon | Nov 11, 2019

BOJ reacts to forex volatility

Published:Sunday | February 3, 2019 | 12:27 AMMcPherse Thompson/ Assistant Editor - Business
The Bank of Jamaica.

The Bank of Jamaica (BOJ) has intervened in the foreign exchange market by selling US$50 million to authorized dealers and cambios to offset what it said was the effects of excessive daily volatility in recent weeks.

That followed the continued depreciation in the value of the Jamaican dollar against its United States counterpart, the average selling rate having moved from $126.46 on November 19 last year to $136.68 as at Thursday, January 31.

Last Friday, the central bank said it sold US$30 million to authorised dealers and cambios via the Bank of Jamaica Foreign Exchange Intervention and Trading Tool (B-FXITT), a rule-based, competitive, multiple-price intervention system to buy and sell foreign exchange to authorised dealers and cambios. The ‘flash sale’ auction, a feature of B-FXITT, followed a similar operation of US$20 million on January 17, 2019, “both of which have been aimed at offsetting the effects of excessive daily volatility in the foreign exchange market in recent weeks,” the bank said.

That notwithstanding, in an advisory to authorised dealers and cambios last Tuesday, January 29, on B-FXITT standard operation, the BOJ said there would be no sales to or purchases from eligible bidders in the four-week period from January 30 to February 20.

Senior Deputy Governor of the BOJ John Robinson explained that the bank publishes a four-week intervention schedule based on information it obtains from authorised dealers and cambios about the need for foreign exchange.

He said that the advisory was an indication from market players that there was no need for the central bank to either buy or sell over the next four weeks.

However, the BOJ usually indicates that if conditions change prior to that and the bank sees a need to buy or sell it, would do so by a flash auction.

Robinson said that based on recent developments and disquiet about the movement in the rate of the Jamaican dollar, the BOJ decided to add liquidity to the market.

In a release, the central bank said that gross foreign exchange earnings flowing into the economy have remained buoyant, and as such, on the macro level, there is no shortage of foreign exchange.

“There is information, however, that several firms are seeking to borrow funds in foreign exchange from the local capital market and this, combined with normal commercial demand, has led to increased demand and recent price movements in response,” the BOJ said.

It said that temporary gaps between demand and supply were normal in a market, and with more than adequate foreign exchange reserves, the central bank stood ready to address the gaps when required.

The BOJ said that it must be noted that efficient intervention and oversight of the market rely on the information the bank receives from foreign exchange dealers, who, in turn depend on the information they receive from their clients.

“While this flow of information has been improving, a lot more improvement is still needed. More foreign exchange users need to give their dealers advance notice of their intention to buy or sell foreign exchange. This will enable both dealers and the central bank to have a more complete picture of evolving market needs and be in a position to act on this information,” the BOJ said.

FLUCTUATIONS IN RATE

It has also encouraged businesses to use forward contracts with their dealers to manage their foreign exchange transactions. “Fluctuations in the rate can be inconvenient, but it is those very fluctuations which create the opportunity for using forward contracts to manage foreign exchange transactions more efficiently and to plan more long term,” it added.

The BOJ said that temporary supply and demand conditions aside, “we must be reminded that as of 2017, contrary to what we have been accustomed to, we have a new foreign exchange market which behaves differently”.

As BOJ Governor Brian Wynter pointed out at one of his quarterly press briefings last year, “It is no longer a market in which the exchange rate drifts in one direction only, and as long as prevailing economic conditions remain as positive as they are, it is normal and to be expected that the exchange rate will keep fluctuating in both directions.”

 

mcpherse.thompson@gleanerjm.com