Time for the Jamaican dollar to revalue again


Friday, February 08, 2019

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On August 17, 2018, I wrote an article “Time for the Jamaican dollar to revalue”, about a week before the Jamaican dollar started a large revaluation from just under $138 to a bit over $126, or close to $11 stronger (interested readers can also review “The Bank of Jamaica has been targeting higher growth and not the exchange rate” written exactly one week later).

Conditions today, which apparently again include the ridiculous speculation that the Bank of Jamaica is trying to devalue the currency because we are again undershooting our inflation target, seem ripe for another revaluation, although it probably won't go quite as far this time.

Last week Friday, president of the Jamaica Chamber of Commerce Lloyd Distant commented on that day's US$30-million B-FXITT flash sale. “We believe that this measure is appropriate to guard against the emergence of disorderly market conditions and restore confidence in the exchange rate, and would support further intervention as needed to smooth the impact of recent portfolio shifts, which we understand, according to the Bank of Jamaica, include several firms borrowing in foreign currency from the local capital market.”

At the end of January, market sources had estimated that there was a roughly US$100-million deficit in the market, primarily due to the refinancing of existing US dollar-denominated debt by large corporate entities.

Since then, a combined US$80-million has been sold in three flash auctions, and the best offered rate has started to fall from its recent high.

I believe this fall will now continue, as we are near the tipping point of satisfying the refinancing driven excess demand (another flash auction today could do it). There is in fact no “fundamental” shortage of foreign exchange. The tourism season has been strong so far (even exceptional), remittance flows are normal, and the oil price continues to be sharply lower than a few months ago.

The issue of what transparency in the foreign exchange market should mean, however, remains.

Some financial market players have argued that the supposed “predictability” of the B-FIXITT auction is actually a disadvantage, as it creates a one-way bet. The B-FIXITT was designed with the help of the IMF, and may benefit from a review by local market participants more familiar with our very thin market, as opposed to being mainly based on experience from the much larger global markets in foreign exchange which operate somewhat differently.

A key proposed change would have more regular auctions seeking to gather information on both sides (both buying and selling), as well as allowing the Bank of Jamaica to intervene as necessary in an unpredictable fashion to avoid the creation of one-way bets.

Ironically, this is closer to what developed markets look like, anyway.

The creation of a true futures market has also been argued as a solution, but this seems to be driven by a misunderstanding of what a futures market can achieve in a market like Jamaica.

For example, if a large financial institution enters into a contract to deliver forward US dollars for a large corporate to extinguish a US-dollar liability financed by the Jamaican dollars it has just raised, the local financial institution will not remain unhedged and will most likely buy the US dollars in advance. In any case, the financial institution will still have to deliver the dollars at a later date, even if it decides to be temporarily unhedged. Only the Bank of Jamaica, and possibly some tourism/remittance players could afford to be unhedged for any length of time.

In summary, there is no point in allowing overshooting of the exchange rate just because some large players want to refinance their existing US-dollar debt.

In future, the Bank of Jamaica should anticipate, and even facilitate this de-dollarisation of our corporate debt. If the money was borrowed domestically in US dollars, then it will simply return to the local banking system and can be recaptured by the Bank of Jamaica at a later date.

We understand that the excess US dollar demand created by these large transactions should have been almost entirely satisfied, which if true means the time to sell your US dollars is now.

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