Market demand is not driving J$, BOJ is

Over the last three weeks there has been more buying of foreign exchange by authorised dealers than selling, yet the Jamaican dollar has slipped in value. This is not the case of market forces determining the value of the currency, it is manipulation by the central bank to achieve a rate they are happy with. Take the case this week. So far, every day the buying of foreign exchange is more than the amount sold, yet the rates have slipped.

According to The Gleaner, the Governor of the central bank of Jamaica, Brian Wynter, while addressing journalists at a Jamaica House press briefing yesterday, said he understood the consternation of sections of the populace as the dollar eased past the J$100 to US$1 mark, but suggested that the dollar was finding its true value in a market-determined environment.

“We in Jamaica are operating a flexible exchange rate regime that is determined by the market and that is based on the principle that is determined by the market,” Wynter stressed.

Wynter signaled that he was unruffled as the movement of the local currency was consistent with the expectations of the Central Bank, operating under a flexible exchange rate regime, to which the Central Bank is committed. “The exchange falls within the boundary of the BOJ‘s forecast,” asserted Wynter.

We understand that the central bank can’t give an indication of what is its intention with regards the rate of the Jamaican dollar, but to say that the rate is being market determined seems like a big joke when one examines what is taking place.

To be fair, the Governor did give a clear indication. As reported in the Jamaica Observer, the Governor said, “If you have a strong exchange rate that benefits the consumer that is going to make it progressively harder for exporters to compete in overseas markets. If you go the other route and have a too weak dollar you will reverse that picture but also have too much inflation in the domestic economy,” he said. “We have to find the right balance and the programme we are operating within at the moment is built on a balance that will best provide the conditions for export-led growth,” he added.

In short, it is our conclusive opinion that the central bank is the one intervening to move the rate — not normal market forces.

The NIR is less than a billion at the end of May. One supposes that physiologically, building the NIR to over a billion dollars would be better ahead of the post-summer months when inflows are less and demand is higher.
Next, is the other strange thing happening in the FX market. Authorized foreign exchange dealers are selling more foreign exchange than they are buying for the past two weeks, which make no sense. Why would they be selling from their inventory if there is going to be much higher rates down the road? Why are they tying up Jamaican dollars at relatively low interest rates if the benefits to be obtained by interest earned will be eroded by a depreciated dollar? The central bank confirmed that the CD issue that ended on the 7th of this month resulted in tighter Jamaican dollar liquidity and that BOJ bought foreign currency from the dealers. In this sense, BOJ is fully aware of what is happening and is clearly trying to beef up the foreign currency reserves. The BOJ has quickly, as the previous CD issue closed, issued two more to pull more foreign exchange out of the system.

Yes, it is supply and demand that’s driving the rate. But the demand is one that is based on the BOJ encouraging the rate to move up by buying the banks surplus funds at higher and higher rates.

Talk back | Do you agree that the BOJ is influencing the demand side of the equation?