Mark Ricketts | The dollar’s movement signals things aren’t right
It has been a wild ride with our dollar (JMD) moving from J$127 to US$1 in June last year to $137 in August, then $126 in November, and on February 4 this year, $137.21.
Our finance minister offered comfort by telling us don’t worry, it’s just a mild hiccup, things will be back to normal soon.
Dare we ask “what is normal” and what is the fair market value of our currency?
Is it $125, $130, $140?
We could think of various expressions to explain the dollar’s erratic movements. Our dollar moves in mysterious ways, its wonders to conform. It is not only slipping and sliding, but as Jerry Lee Lewis would say, “a whole lot of shaking going on”.
Can you imagine in the height of the tourist season, the dollar, which was $128.44 on Christmas Eve, climbed to $131.01 by January 21 this year, even after Bank of Jamaica’s (BOJ) extraordinary intervention (flash sale) of US$20 million on January 17. Then, literally overnight, the dollar spiked to $137.21 by Friday February 1, forcing another flash sale of US$30 million.
The devalued dollar, ever stubborn, would not yield, and BOJ had to bow with another US$30 million flash sale on Monday, February 4, to try and force the dollar to reverse course.
The currency still showed resistance, forcing another US$20 million flash sale on Wednesday, February 6. The dollar then strengthened, opening a week later at $134.86.
It should be pointed out that B-FXITT, our flexible foreign exchange regime, allows the dollar to float, with BOJ intervening in a structured manner in which information is made public in advance as regards BOJ buying and selling intentions.
The central bank, however, in extreme circumstances, characterised by excess volatility or disorderly market conditions, can undertake extraordinary intervention in the Forex market.
Such intervention should not be occasioned by the mere fact of the dollar depreciating in value and the authorities feeling inclined to assuage people’s concern by propping up a weak currency.
B-FXITT was designed that our dollar would essentially be market-determined and BOJ would have a limited footprint. With more than limited footprint currently, are we restoring confidence in the dollar or treating the symptoms of a disorderly market?
Unless the bank has an idea of the dollar’s fair market price, and observes divergence, it could be using the country’s valuable reserves to distort the foreign exchange market.
In the last year and a half, our major interventions have totalled $US495 million. Some of that foreign exchange should have been used for productive activity to combat underperformance in the real sector.
The dollar’s weakness is signalling that what is happening in the economy is not right and must be addressed.
Merely propping up the dollar as a feel-good exercise is making Government and the private sector delay correcting waste, corruption, below average productivity, and an education system out of sync with society’s needs and out of tune with global technological advances. Providing an alert is why the exchange rate is so important.
In 2017, the dollar appreciated in value 146 days and fell 103, closing the year up 2.6 per cent. In May that year, it devalued, reaching $130. What was significant was that US$240 million intervention occurred in that same month, which helped the dollar strengthen against its US counterpart. It closed out the year at $125.
For 2018, the dollar appreciated 114 days and declined 136, reaching a low of $137 in August. However, between August and December it strengthened, stabilising in the $127 region. This recovery, as in 2017, benefited from the bank’s intervention of US$155 million between August and mid-November.
The society felt good that the dollar would remain stable, as both Finance Minister Dr Nigel Clarke and BOJ Governor Brian Wynter emphasised things were different this time around, especially with macroeconomic stability entrenched.
And with net international reserves of US$3 billion and another US$3.5 billion in commercial banks, there was no shortage of foreign exchange. In the esoteric language of economists, reserves coverage was more than adequate.
Confidence was enhanced further when our two heavyweights joined other heavy hitters, including Keith Duncan, co-chairman of the Economic Programme Oversight Committee; International Monetary Fund’s Mission Chief Uma Ramakrishnan, and IMF’s Resident Economist Constant Lonkeng, to show that the exchange rate, which is incorporated in the consumer price index, would be increasingly irrelevant.
With an independent BOJ focused primarily on inflation targeting to ensure price stability, and inflation well below forecast, exchange rate movements needed to be feared no more.
Oh glorious day, our low inflation rate has washed away our exchange rate which had caused so much grief.
So sustained and persuasive was the position adopted by our heavy hitters from August last year, that one would have been dubbed a traitor not to embrace their thinking, although I would qualify, based on my Sunday Gleaner columns in August and September.
Suddenly, the respite the society received from August meant nothing, as the dollar rapidly depreciated in the new year. What was particularly disconcerting were the whispers and articulated concerns about reduced availability of foreign exchange.
We have an extremely thin foreign exchange market that can be influenced by oversize transactions, accentuating volatility, and inadequate investment vehicles and financial options.
There is, therefore, additional risk exposure resulting in higher risk premium for investors and traders in financial assets and goods and services. It is difficult planning and making decisions when to clear goods, ship goods, price invoices, determine mark-ups/mark-downs, and purchase, hold, or sell foreign exchange.
Dr Clarke’s recent announcement to improve the interbank system in accessing foreign exchange is welcome news.
The pattern that our dollar only strengthens when there are large or protracted injections from the BOJ is worrisome, as valuable reserves could be deflected from production to shoring up our dollar without us making meaningful changes in our economy.