BOJ chief touts stable foreign exchange market

Jamaica's foreign exchange system has entered into a new paradigm of flexibility, where the value of the Jamaican currency is likely to move in either direction based on market conditions, according to Brian Wynter, governor of the Bank of Jamaica, BOJ.

He also said the currency is now fairly valued.

From January to November 23, the Jamaican dollar appreciated against the US dollar on 127 days, while depreciating on 98 days, said Wynter. That compares with 174 days of depreciation during the comparative period in 2016, during which there were 51 days of appreciation.

For the 12 months to November 23, the Jamaican dollar appreciated by 1.9

per cent compared with depreciation of 7.7 per cent during the same period in the previous year, the BOJ governor said.

The Jamaican dollar has for several weeks been trading at just over $126 to the US dollar, down from a high of just over $131.

"Jamaica's transition to a more modern competitive foreign exchange market is now successfully in train," said Wynter during his quarterly press briefing on Monday.

He attributed that to fundamental changes in market behaviour as well as the way in which the central bank interacts with the market.

Wynter said the initial intent of the BOJ's Foreign Exchange Intervention and Trading Tool (B-FXITT), introduced earlier this year, was to provide market participants with reassurance about the availability of future supplies.

"Thanks to favourable market conditions, including increased inter-dealer trading, Bank of Jamaica has already been able to reduce its sales to the market in the face of declining net demand and, in fact, is now preparing to announce the introduction of buying operations under B-FXITT," he said.

Since the start of 2017, he added, the Jamaican dollar has experienced at least three episodes of upswings followed by downswings, with the August to September period seeing an even sharper depreciation followed by its strengthening in October.

Wynter said that may have been prompted by the response of market participants to increased US dollar supply arising from an unexpected early redemption of a government US dollar bond, the issuance of a local currency bond indexed to US dollars, and a significant reduction in the amount of foreign exchange that authorised dealers and cambios are obliged to sell to the BOJ each day.

MARKET PARTICIPANTS

"It is also true, no doubt, that a number of market participants may have overbought during earlier cycles and in the earlier phase of the current cycle, thereby exacerbating the conditions of excess supply and reduced demand that have been driving the current strengthening trend," he said.

"The picture is made complete when we add to this the generally buoyant inflows into the market due in part to a surge in tourism arrivals and spending."

Wynter said the changes in market behaviour are occurring in the context of a currency that remains broadly valued as reflected in the performance of the external accounts.

"We have said this before on many occasions but it still needs to be repeated so we all grasp this fact: the current account of the balance of payments less imports already paid for by foreign direct investment has been in surplus for the past two fiscal years," Wynter emphasised.

"In other words, the income earned from abroad by Jamaica from exports of goods and services exceeds the amount that we spend to pay for the imports that are not already paid for by foreign direct investment," he added.

The governor said the Bank's forecast is for that trend to continue into the medium term and hence the performance of the exchange rate should not be a surprise.

Wynter said that with the two-way exchange rate movement the market will become more liquid, transparent and conducive to innovation.

"Buyers and sellers will now be required to plan more carefully as there is no longer a safe one-way bet on the direction the exchange rate will take. This uncertainty is expected to encourage further market development as financial institutions develop hedging tools to satisfy the needs of buyers and sellers of foreign exchange," he said.

He said the two-way volatility and increased hedging activity will further reduce the exchange rate pass-through to inflation and allow Jamaica to move with greater confidence towards the desired goal of full-fledged inflation targeting.

Adequate supplies of foreign exchange and a significantly reduced exchange rate impact on inflation will eventually weaken the misplaced focus of the public on the exchange rate as a measure of overall economic performance and the primary indicator of future inflation, Wynter said.

mcpherse.thompson@gleanerjm.com