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Bank of Jamaica intervenes again in forex market

Published:Wednesday | July 8, 2015 | 12:00 AM
The Bank of Jamaica building at Nethersole Place, Kingston.

The Bank of Jamaica (BOJ) intervened in the foreign exchange market again on Tuesday, selling United States dollars to its dealers and cambios in an effort to prevent large swings as the continued depreciation in the exchange rate, resulting in the Jamaican dollar trading above the $117 to US$1 mark.

There were no stipulations on the resale rate as the central bank continued the less restrictive approach to market interventions it adopted since December last year.

Despite the bank's intervention, the Jamaican dollar continued to climb, closing at $117.10 on Wednesday. In inter-day trading, the US dollar was being sold at a high of $123.05 and a low of $114.

Since the start of the fiscal year 2015-16, the BOJ has intervened in the foreign exchange market on four occasions, two in May and one each in June and July, selling a total of US$196.4 million and purchasing US$71 million.

BOJ Senior Deputy Governor John Robinson told the Financial Gleaner that "the bank generally intervenes to smooth the flow of foreign exchange in the market and to prevent large swings in the exchange rate on either side".

On 26 June, the BOJ sold US$59.64 million in the foreign exchange market and on Tuesday this week it sold US$37.9 million. The rate offered on July 7 was J$117.04, while that offered on June 26 was J$116.89.

No rate restriction

Robinson said there was no restriction on the resell rate and that the central bank was not defending any particular rate.

"As per usual, the BOJ aims to smooth the flows in the foreign exchange market. It does so by selling US dollars in the foreign exchange market and by buying excess foreign currency from the market," he emphasised.

In relation to the effect of interventions on the net international reserves (NIR), he said the net impact from the interventions approximated a decline of US$85 million since April 1.

Notably, he said, "The BOJ's operations have resulted in an overall positive impact on the NIR since the start of the fiscal year as the foregoing analysis does not account for the standing purchase arrangements, or CD placements, with the BOJ."

The NIR stood at US$2.12 billion at the end of June.

The central bank also said that the acceleration in the pace of depreciation of the Jamaican dollar against its United States counterpart was not likely to significantly change its projections for inflation for the 2015 period.

The bank continues to project that inflation will be in the target range of 5.5 per cent for 2015, and 7.5 per cent by the end of fiscal year 2015-16.

"Notably, inflation for the calendar year to May 2015 was 0.1 per cent, the fiscal year to May 2015 was 0.7 per cent and the annual point-to-point inflation was 4.0 per cent as at May 2015," he said.

Months of slow appreciation

The depreciation compares to several months of slow appreciation, from early February to early April, which was said by local analysts to have been caused by the Jamaican dollar requirements of tax season.

The dollar retreated from $115.81 to US$1 on January 30 to $114.99 to US$1 on April 10.

One analyst suggested that because of huge tax payments, there was a high demand for Jamaican dollars and so persons sold US dollars to make those payments.

At the time, the central bank noted "a fairly sharp fall-off in demand from people who may have been hedging and from people who may have been just holding long positions in foreign exchange, as well as increasing supply from tourism and from remittances".

On Wednesday, the central bank said that higher demand in the June quarter 2015 appeared to have been occasioned by more imports.

"Following an estimated current account surplus in the March 2015 quarter, payments for imports appear to have been higher in the June quarter, warranting higher demand for foreign currency. In particular, foreign currency demand from the energy sector was higher in June, given the recent increase in oil prices," the BOJ said in emailed responses to Financial Gleaner queries.

The bank said that since the start of the fiscal year, the exchange rate has depreciated by less than two per cent

At the end of June, the 12-month point-to-point depreciation in the exchange rate was 4.2 per cent, "much slower than the annual rate at end-March 2015," the BOJ noted.