Thu | Jan 28, 2021

Heightened uncertainty around volatility in FX rate

Published:Friday | February 7, 2020 | 12:17 AMMcPherse Thompson - Assistant Editor – Business

With the Jamaican dollar once again trading past $141 to the US currency, there continues to be market apprehension and heightened uncertainty around the volatility of the foreign exchange rate.

However, the Bank of Jamaica, BOJ, continues to consult with the market in an effort to smooth out demand and supply imbalances, according to Chairman of the Economic Programme Oversight Committee, EPOC, Keith Duncan.

He said the BOJ, which recently introduced a foreign exchange swap arrangement, is encouraging authorised dealers and cambios to further deepen the market through the introduction of forward contracts while it looks towards implementing an electronic trading platform that will provide greater transparency and price discovery for market players.

With those reforms, “we’ll hopefully see reduced volatility,” said Duncan, as he provided an update on the Government’s economic reform programme on Wednesday.

He said EPOC, which met just over a week ago, has acknowledged the BOJ’s efforts, noting that the central bank has been in consultation with the Jamaica Manufacturers and Exporters’ Association, the Jamaica Bankers Association and other sector players to determine how they can assist in smoothing out the volatility.

“Even if you look at the business confidence numbers, the volatility in the foreign exchange market has come up as an issue. We are hopeful that these reforms will address that volatility, knowing full well that we are a part of a global foreign exchange market,” said Duncan, who is also president of the Private Sector Organisation of Jamaica.

He said EPOC was hopeful that as the reform in foreign exchange market “take hold, volatility levels and the swings in the currency could be reduced. However, Jamaica is only a very small player in the global FX market and will always be exposed to, and not insulated from, volatility and movements in the international FX market.”

Duncan, who is also CEO of financial conglomerate JMMB Group Limited, said his company was looking to introduce foreign exchange forward contracts.

“Our product development team is doing the work right now. We would like to introduce it for small and medium enterprises. We are standardising contracts, and we are actually commoditising it so that a small business player can say, ‘Okay, I want to buy $25,000 six months from now and I will pay for the right to acquire that money right now’,” said Duncan.

“We want to be able to give them that room so they can have some certainty in how they do their business. We expect to roll that out within six months time but we have to make sure we get it right going forward,” he said.

The central bank announced the introduction of swaps on January 22 as a tool to enhance its management of the forex market and provide US dollar liquidity.

Under the arrangement, the BOJ will sell US dollars to authorised dealers with a predefined limit at the prevailing market rate, with an agreement to buy back the same amount of US dollars at a future date at an agreed forward rate.

The weighted average selling rate of the USD was $141.54 on Wednesday, its highest year to date, which reflected a near $9 or 6.8 per cent depreciation of the JMD in just over a month. The currency traded at similar levels and peaked at $142.23 back in November.

As for economic growth, Duncan said EPOC concurs with the Planning Institute of Jamaica that it will be low for the remainder of fiscal year 2019-20. However, EPOC expects that going forward through 2020 to 2022, “as the impact of the fallout from mining is behind us, growth should begin to get back to the two per cent growth levels,” he added.