Is this the end of the dollar slide?

Revalued currency or somewhat temporary blip?


Wednesday, February 21, 2018

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The Jamaican dollar hit a high of J$131.31 to US$1 last year September, but since then has revalued to J$127 as at Friday's trading. And so security dealers have been in a position where the trend to hold US dollars had created significant paper losses over the last six months.

The recent spate of initial public offers (IPOs) on the Jamaica Stock Exchange (JSE) has also created a demand for JMD coupled with the Government of Jamaica's (GOJ) early redemption in September 2017 of a US$500 million in locally held securities that wasn't slated for maturity until 2020.

So the market was flooded with cash, and that cash had at least one possible home in the JSE – as long as the IPOs kept rolling out.

Then the spate of real estate developments have also served to soak up the liquidity in the market.

So does that mean we are in a new era of a strong Jamaican dollar?

Not so fast, says Ramon Small-Ferguson of JN Fund Managers (JNFM). His research shows that Jamaica has one of the highest rates of dollarisation in the Caribbean in terms of cash held in savings accounts. It would seem that Jamaicans are not quite ready to let go of the USD.

“A key measure of dollarisation is the percentage of local deposits that are held in foreign currency (FX). As at June 2017, 46.30 per cent of customer deposits in Jamaica were denominated in FX, up sharply from 27.90 per cent in March 2011. Jamaica's rate of dollarisation remains one of the highest in the Caribbean, according to the International Monetary Fund (IMF).”

However, despite savers' desire to hold on to USD, Small-Ferguson says that the economy is heading in the right direction to allow for a more flexible approach to currencies, instead of savers' strangehold on the USD.

“The continued improvement of the local economy under the guidance of the IMF has also caused a shift in some of the key factors that have traditionally fuelled the depreciation of the Jamaican dollar. Jamaica, for example, has been able to accumulate a large stockpile of Net International Reserves which stood at US$3.09 billion (22.5 weeks of imports) as at October 2017 relative to the 10-year low of US$835 million in November 2013. Coupled with the liquid state of the FX market, this has served to alleviate the fears traditionally held by users of FX in the real economy surrounding the availability and affordability of foreign exchange.”

And the JNFM research manager adds, “Additionally, largely resulting from the significant decline in the price of oil, Jamaica's current account deficit has narrowed over the last three calendar years. For the calendar years 2015 and 2016, foreign direct investments exceeded Jamaica's current account deficit, which has resulted in a surplus of FX.”

So what does that mean for the man in the street?

It means, according to Small-Ferguson, that “in the medium term (18 months) we anticipate that the Jamaican dollar will be characterised by newfound two-way volatility versus the US dollar. We expect the exchange rate to be influenced more by fundamental factors such as supply and demand and the state of key economic indicators such as the balance of payments and inflation as opposed to speculative trading. We forecast that the currency will exhibit relative stability, with movements being ultimately reflective of the difference between inflation in Jamaica and the United States.”

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