By Andrew Green, Staff Reporter
Bank of Jamaica
A KEY barrier in the foreign exchange market was preserved yesterday following a major state intervention.
The interest rate hike and foreign currency injection, was aimed at halting the slide in the value of the currency when the Jamaican dollar lost 30 cents in value. It closed at a weighted average selling rate of $49.64 against the US currency on Tuesday, putting it close to the $50 to the US dollar mark.
"The Bank of Jamaica intervened in the market today (Wednesday)," said Earle Harriott, president of the Cambio Dealers Association of Jamaica. "It was a double whammy."
Bank of Jamaica (BoJ) reverse repurchase (repo) rates on 90 day instruments were hiked 2.00 per cent from 17.25 per cent to 19.25 per cent, and on 120 day instruments rates rose 2.35 per cent from 17.05 per cent to 19.40 per cent. A Government of Jamaica 91-day Treasury Bill auction yesterday showed results in a similar range, with an average yield of 18.94 per cent.
"The adjustment to interest rates is also being supported by the provision of US dollar liquidity by way of substantial sales of foreign exchange to the market," the BoJ stated in a release yesterday. It said, "This action is in keeping with the Bank's strong commitment to maintain orderly conditions in the foreign exchange market."
The quick slide in the value of the local currency from Tuesday was stopped, as it gained nine cents in value against the United States dollar in trading yesterday.
"It reversed the depreciating trend," said Steven Bruce-Miller, trading manager at Jamaica Money Market Brokers. He said the dollar had been slipping because of the low liquidity in the US fixed income market where dealers were seeking foreign currency to carry out transactions.
Some investors were also speculating on the direction of the currency, Mr. Bruce-Miller said. But, "The first reason is the most important."
Pre-election uncertainty had been prompting speculation on the currency, Mr. Harriott agreed. He also suggested some supply factors.
The country was recovering from a dip in tourism revenues around anniversary of the September 11 suicide attacks in the United States, the president said. But there was no recovery as the flooding from Isidore and Lili followed, further dampening tourist revenues as tourists stayed away.
And following that flooding, the island has shifted into election mode. Mr. Harriott said, "people also got travel guides telling them whether it was safe to travel to Jamaica during the elections."
UNDER PRESSURE
The exchange rate of the local currency has been under pressure for some time.
At the start of the year the weighted average sale rate against the US dollar was $47.40. By August 30, that had slipped to $48.79.
In early August the BOJ carried out a major intervention to protect the local currency against what it described as market instability. The Bank hiked its repo rates from 13.15 per cent to 17.25 per cent on 90 day instruments, and on the 120-day instrument from 13.25 per cent to 17.05 per cent. These increases amounted to 4.1 per cent and 3.8 per cent respectively.
"You have demand from merchants to buy dollars in order to facilitate transactions, so the pressure for the remainder of the year should be sustained," Mr. Bruce-Miller said. "What can reduce some of that pressure is the sustained presence of the central bank in the foreign exchange market."
The BOJ statement yesterday said it had, "the capacity and will take any further action that may be required to maintain stability."
