Camilo Thame, Business Reporter
The Jamaican dollar (JMD) fared reasonably well against the American greenback during 2006, slipping less than four per cent in the calendar year to Wednesday, reflecting the central banks monetary policy of grandfathering the currency via regular interventions in the foreign exchange market.
At mid-week, one United States dollar (USD) traded at an average J$67.02, pushing down the value of the JMD to 1.5 United States cents, down from 1.55 U.S. cents a year ago.
The Jamaican dollar also depreciated against its other trading partners, the Canadian dollar (CND) and pound sterling.
Gains made on the CND during the first half of the year were eroded, correlating with a fall in world commodity market prices which pulled down the value of the Canadian against the USD, whereas the British pound gained nearly 12 per cent on the hard currency, reflecting a reverse in interest rate differentials in sterling's favour.
Charles Ross, who for years has tracked the flow of money in the economy, suggests that the local currency's performance against the US is largely a function of liquidity in the JMD market.
"The supply of the Jamaican dollar drives the demand for U.S. currency," said Ross, managing director of the financial services firm, Sterling Asset Management.
"On a day-to-day basis there is not a significant change in the amount of U.S. dollars available in the market, but the availability of the Jamaican dollar is a bit more erratic," said Ross.
The Jamaican forex market trades five days per week. Available American currency averages US$45 million per day, according to Financial Gleaner calculations.
"Any substantial movement in the availability of the Jamaican dollar translates into inflation and higher demand for the U.S. dollar for imports, usually translating to adjustments in the exchange rate," says Ross, an economist and investment advisor.
"As long as there is a deficit, then it continues to move in the same direction."
Jamaica's trade deficit topped US$2.4 billion at the end of August, widening 14.3 per cent for the first eight months of 2006 when matched against the similar period in 2005.
Oil prices
Colando Hutchinson, foreign exchange trader at Pan Caribbean Merchant Bank, pegged some of the movement in the dollar to increase in oil prices, currently hovering at US$61-US$62 per barrel versus the approximate US$50 that crude prices averaged in 2005.
"The Jamaican economy is characterised by a high level of imports compared to exports, resulting in relatively high demand for U.S. dollars and thus an appreciation in the U.S. dollar," said the trader.
"This coupled with the increases in oil prices throughout the year was a major factor driving the demand for U.S. dollar."
The approximate 3.8 per cent slip in the value of the JMD this year compares favourably to the average annual 7.0 per cent decline since the turn of the decade. The worst year was 2003 when the JMD fell almost $10, or 19 per cent.
Price adjustments
Oil price movement along with price adjustments across a range of commodities caused the Canadian dollar to make significant gains against the U.S. by mid- 2006 when it peaked at 91 U.S. cents to one Canadian, an 8.0 per cent gain.
But the price of oil along with several commodities have since fallen from their peak although settling above prices at the start of the year.
Oil, for example, had reached US$78.40.
"The Canadian dollar is considered the commodity currency. The Canadian appreciated significantly in the second quarter of this year and peaked in April. During the second quarter, there was a substantial rally in oil and commodity prices while interest rates in the US topped out," Ross noted.
"Since mid-year, commodity prices have generally fallen off and the Canadian dollar is back where it was at the start of the year."
On Wednesday, the CND sold for an average J$58.28, or just about six per cent higher than the start of the year. But to the U.S., it was only two per cent higher than it was at the beginning of 2006.
Hutchinson also attributed the higher interest rates in the US - which was finally halted this year at 5.25 per cent after 17 consecutive hikes — to some of the slippage in the JMD.
"An increase in interest rates in the U.S. caused investors to shift funds into U.S. to take advantage of those opportunities," said the forex trader.
Interestingly, as U.S. interest rates halted their climb in the second quarter of 2006, those in the United Kingdom and the larger European Union were hiked, causing the British pound and the euro to appreciate against the greenback.
"The pound increased against the U.S. mainly due to interest rate movement. Interest rates in the U.K. moved up so the differential between interest rates in US and U.K. went down," Ross said.
At peak
"The speculation is that the U.S. interest rate is at a peak, so the next move will be for it to go down. If that happens, the interest rate differential in the U.S., which is now positive, will become negative and people will prefer holding pounds versus U.S."
In 2005 when interest rates were going up in the U.S., the pound fell by 12 per cent against the USD.
Hugh Miller of Bank of Nova Scotia, expects interest rates in the U.K. and the EU to go up.
"In the U.K., policymakers tend to look on how buoyant the housing market is. There is expectation that interest rates will be pushed up another quarter point up," Miller told the Financial Gleaner.
"There is also speculation that euro interest rates will go up another quarter point because inflation is not yet tamed in the trading bloc."
Miller also highlighted another development taking place in Japan, which could further devalue the U.S. dollar against other major currency and opens room for arbitrage.
"People tend to not take into account 'carry trade', where investors borrow funds in Japan at a quarter point then invest in U.S. assets at five points," he said.
"But interest rates in Japan are going up, leaving the investors with less room to maneouvre for exchange rate movements between the Yen and U.S. dollar. This means that supply of US dollars will be lowered, as investors will borrow less in Japan to purchase US currency to invest in the US," Miller said.
camilo.thame@gleanerjm.com
Exchange Rates 2000-2006
| Year | J$:US$1 | Change ($) | Change (%) |
| Dec 2000 | 45.53 | -3.87 | 9.3% |
| Dec 2001 | 47.40 | -1.87 | 4.1% |
| Dec 2002 | 50.97 | -3.57 | 7.5% |
| Dec 2003 | 60.62 | -9.65 | 18.9% |
| Dec 2004 | 61.63 | -1.01 | 1.7% |
| Dec 2005 | 64.58 | -2.95 | 4.8% |
| Dec 20 2006 | 67.02 | -2.44 | 3.8%
|
