Ceteris Paribus:Respect Gwenzi
IT is now 20 weeks since the interbank market was restarted and modified to a weekly auction in June. The 20 weeks show a stark contrast right in the middle. In the first 10 weeks, the local currency was on a free-fall losing an average of 4% a week, while in the later half the currency largely stabilised scratching an average of 0,2% in gains a week.
A microscopic view, however, shows that it has not been a smooth sail for the local unit in the latest 10 weeks. The currency gained in the first seven of the second 10 weeks and in the remaining three weeks, has been facing downward pressure succumbing to successive losses. Moreso the margin of losses has increased in successive trading weeks, widening in the latest auction.
Is the widening depreciation margin a cause for concern? Is the Zimdollar losing its earlier stability against the greenback? Well, the technical reading is that near-term stability is forecasted to be under threat. Key indicators include the overall demand size. From US$14 million in the first five weeks, to US$16,5 million in the second five weeks, to US$22 million in the third five weeks and ultimately US$27 million in the latest five weeks, demand has clearly been rising.
Demand for forex has grown at a constant average growth of 5,2% a week over the 20 weeks. Typically rising demand, all else being constant, drives the price of forex higher.
We have, however, seen an equally growing supply to match the demand. In the first five sessions, the level at which demand was satisfied was almost 80% but that has since improved to 100% over the latest 10 weeks. The performance shows that there has generally been sufficient supply for each level of demand and this has helped stabilise the currency. To date the highest weekly allocation was at US$30,4 million, on September 22.
Our reading of the supply and demand dynamics is that sustained higher levels of demand have the potential of weakening the local unit given the high national import level. Trade data shows that the country imported goods valued at US$441 million in September which deduces to a daily import demand of US$20 million.
On the other hand interbank data shows that only US$5 million on average was traded on the interbank a day. The variance remains very high even after factoring own imports by some exporting or forex generating local companies.
Assuming liberally that 60% of all foreign currency trades are conducted via the interbank, it gives us a crude estimate of over US$8 million trading outside the formal market. It is therefore safer to assume that the market is not yet in equilibrium and an envisaged rebalancing of the national fiscus in 2021 may cause serious shocks to the currency earlier in the respective year as supply lags.
Looking at the bid spread, data shows the lower bid has been rising closer to the weighted average rate. The growth in lower bids reflects demand pressure and this combined to a runaway top bid clearly reflect the state of the market. A concurrent rising lower and top bid reflects the pressure on exchange rate and this has been the case over the latest three weeks.
Naturally so, the depreciation in the exchange rate reflects the strain on supply. We expect this to remain in place throughout the remainder of the year. We also note that the spike in demand is seasonal. Data shows festive import demand is typically 25% ahead of the succeeding first quarter.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com.