Aug 2016 Financial News

BOJ interventions likely slanting forex demand

Aug 31, 2016

The Bank of Jamaica (BOJ) will continue its interventions in the foreign-exchange market amid a slide of the Jamaica dollar, even as the central bank weighs whether its own dealings are fuelling market demand.

The BOJ now intends to review its mode of interventions to assess their impact and possibly revise them.

In the span of one and a half weeks, dating from August 19 to August 29, the central bank sold US$104 million into the market amid an uptick in demand for hard currency.

"We have continued in the market with a lesser amount, and the pressure, as indicated by the kind of bids that we have seen in our intervention, has diminished quite significantly, but we still see an appetite," BOJ governor Brian Wynter said at his quarterly press briefing on Monday.

The Jamaican currency traded at $127.44 to the US dollar on Monday. On that day, the BOJ sold US currency to its authorised dealers at $127.3602, with no restrictions on the resale price.

Asked what was causing the pressure on the local currency, Wynter said, "We do not see any shifts that we can point to that would cause a drive in foreign exchange demand at this time, other than the sort of seasonal effects that we have seen in the past."

But he also said: "We believe that there is a dynamic that develops when the Bank of Jamaica intervenes. That itself can create some demand, and therefore, the mechanisms used for intervention require a review and some change, which I believe would allow us to deal with this type of pressure."

Wynter said pressure on the local currency builds up as people talk more about the exchange rate moving, "and as the central bank, we've seen in recent patterns as we start to intervene that also sometimes cause more people to say, 'well let me buy some of this money,' and you see sort of a bigger demand".

Wynter said no large bond issue was driving the pressure as was the situation in the April/May 2016 period when the central bank intervened in the market.

"There are financings going on that may play a part, but we would not say that that's decisive at all at the moment," he said.

The central bank has to be cautious in its reactions to pressures on the exchange rate, the governor said, because there are different types of reasons people need to buy US dollars. Businesses usually stock up at this time of year, he added.

The central bank points to increased demand for currency from the manufacturing and distribution sectors. It also cited the increase in private-sector credit over the past year as a potential contributor to pressure in the forex market.

"If credit demand is expanding, in order for businesses to borrow to invest and retool, for example ... we are going to see foreign-exchange demand because the equipment, by and large, is normally imported, especially if we are updating a line for manufacturing, for example," Wynter said.

"We don't look at this as untoward developments," he said, adding that the BOJ intervenes whenever it detects "disruptive behaviour, excess movements or shortages in the market".

"We are there to deal with them once they are large enough to become a problem, but of course, we don't want to be sort of stopping the market from being a market, and therefore, we have to accept movements in the exchange rate as a part of how our markets work."

Wynter said that may seem disturbing to hear, "given the history, especially in the last few years, where he have had sort of a one-way movement in the exchange rate, and so people rightly get concerned and say, 'well, won't this stop at some point?'" he said.

"I think it's important for us to reach a point where the exchange rate and the participants in the market experience exchange rates moving in both directions. I believe we are much, much closer to the day than we have even been to that day," Wynter added.

Source:
McPherse Thompson
mcpherse.thompson@gleanerjm.com
Jamaica Gleaner
Wednesday August 31, 2016

http://jamaica-gleaner.com/article/business/20160831/boj-interventions-likely-slanting-forex-demand