Business

Bad bet

Somebody lost millions in US currency gamble, says BOJ governor

BY KARENA BENNETT
Business reporter
bennettk@jamaicaobserver.com

Friday, October 20, 2017

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Bank of Jamaica Governor Brian Wynter has revealed that at least one person lost millions in a bad bet on the depreciation of the local currency against the US dollar, despite attempts by the central bank to warn the public that the Jamaican dollar is fairly valued.

Wynter, who was guest speaker at the Jamaica Chamber of Commerce Breakfast Conversation on Wednesday, said since the introduction of the Foreign Exchange Intervention and Trading Tool (BFXITT), some market participants have failed to learn from the experience and have failed to pay attention to the available information, causing them to make poor investment decisions.

He added that in spite of arguments to vilify BFXITT for periods of depreciation in the local currency, the system is designed to foster more competitive behaviour among authorised dealers and cambios of foreign currency, and will reward dealers who provide the best service and the best margins for customers, while becoming a disadvantage for those who do not.

“But speaking of disadvantaging, those who make poor decisions, during the month of May before BFXITT was introduced, BOJ intervened in the market with sales of US$240 million. We made those sales despite all indications that there was in fact adequate supply of dollars in that month,” Wynter said.

“We sold those funds at over J$130 to the US, but we bought back most of it in the month that followed and we bought them back at cheaper rates, closer to J$129 to the US dollar. Somebody lost millions of Jamaican dollars on a bad bet, but I would not be surprised if you never heard about that,” the governor said.

Wynter went to say that during the month of August, in the face of movements in the exchange rate, net demand for the US currency began rebuilding which again resulted in a number of Jamaicans losing money in September.

According to the BOJ governor, the build-up in demand for foreign currency continues to be aided by “unhealthy doses of fear mongering” designed to support passionate exaltation for the Government or the BOJ to sell more US dollars or stabilise the rate.

“Predictably, the exchange rate went above J$131 to the US dollar again, despite increases in the BOJ pre-announced interventions; despite the Government giving a month's notice as required to prepay half a billion US dollars in bonds to the local market; and despite, similar to the May episode, indications that US dollar supply was in fact adequate,” he said.

“Yet again someone is paying a heavy price for their bad decision as the exchange rate has once more fallen below $129 to the US dollar.”

Given Jamaica's history of prolonged and sustained currency shortages, Wynter reckons that individuals have become accustomed to the dollar slide and still holds on to ideas of depreciation, even in a context where, for the 12 months to last Friday, the exchange rate appreciated by .04 per cent compared with a depreciation of 7.7 per cent for the same period a year earlier.

Moreover, as at Tuesday, the weighted average selling rate at $127.97 strengthened by 0.5 per cent for fiscal year.

“Some slide. But the rhetoric still holds us. I have no doubt that persons who read this article may say, let's just wait, it's temporary, it's going to move again. Dollar slide, it is rhetoric and we need to break out of it,” Wynter warned.

“For nearly two years the bank has steadfastly explained to the public that the Jamaican dollar is fairly valued but the dollar slid; the rhetoric and the fear mongers drowned out the message. I would like to be quite clear about this: whenever the exchange rate is consistent with our overall economic performance relative to our trading partners, and particularly when our national earnings in foreign currency approximate our national spending, the exchange rate is fairly valued.

“But it will fluctuate around that level as demand and supply change from one day to the next, and those changes include changes in perception as well as real changes happening on the ground,” he said.

Wynter, in defence of the new system, further noted that since the implementation of BFXITT in June, it has addressed weaknesses of the previous method which relied on weighted average selling rate (WASR) that did not always reflect true market price on the day of the transaction. It meant that some institutions may have bought foreign exchange from the central bank at a price too expensive or too cheap, compared to what they might have paid on the open market.

In mitigating the issues, through BFXITT, BOJ now sells at market-determined rates which will improve the efficiency of the foreign market but cannot change the overall fundamentals which influence currency prices.

Consequently, the governor noted that continuous appreciation of the local currency going forward will be led by little to no net pressure on the foreign exchange market from improvements in Jamaica's current account balance of payment. He said that over the last two fiscal years, the country showed signs that foreign currency earnings are adequate, recording a deficit of less than two per cent of GDP, well within the range that is considered to be sustainable for Jamaica.

For the fiscal year 2017/2018 and into the medium term, the current account deficit is projected to remain sustainable between one and 10 per cent of GDP, with imports financed by foreign direct investments running three to four per cent of GDP each year.

“When you put that against the deficit I mentioned, you can see that fiscal year 2017/18 will be the third year in a row where current account transaction will place no net pressure on the foreign exchange market. This has not occurred since the 1960s, and we are still struggling to get data to confirm where it even happened in the '60s.

“Our forecast is that it will continue into the medium term,” he said.

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