IN the latest foreign auction trades on the interbank market, the Zimbabwe dollar fell by 0,16%, which is the widest loss in five weeks. The exchange rate crossed the 1:84 mark for the first time as cumulative year to date losses widened to -2.8%.
Despite the weekly loss, the cumulative year to date loss reflects the most improved performance, over a similar scale since the currency’s reintroduction in 2019. In the first five weeks of trading on the interbank (June-20), the Zimdollar lost a cumulative -28,15% and maintained sharp losses into the 15th week, before stabilising. Supporting the conservative losses in the current year is improved supply of forex on the interbank.
The chart shows a historical computation of interbank rates per session since January. It shows the highest bid level per each session, the lowest bid and lowest acceptable bid level. The lowest acceptable bid level is threshold considered for purposes of allocation.
The chart, more importantly shows the weighted average rate. This refers to the rate arrived at after considering each buying point in relation to volumes of trades.
From the chart, the level of top bids has shown stability at around 87 over the latest five-week period and over the period, the weighted average rate has also pared at a more stable rate than in prior periods.
Likewise, the lower bid and lower accepted rate have also stabilised at 82. From a technical perspective, these collective trends show a market moving towards a more sustainable stable exchange rate. A narrowing range between the top and lower rate and a convergence of the lower to lower acceptable all point towards an entrenching stability.
However, these trends cannot be looked in isolation, two fundamental aspects of the market will have to be analysed to give us a more solid perspective on currency stability. These fundamental factors include the parallel market rate and the level of trades on the interbank. Looking at the computed data, the levels of trades on the interbank shows that year to date, the level of average weekly allocations came in at US$35.4 million, which is quite huge.
This deduces to a daily forex utilisation of circa US$5 million and an average 5-day week average of $7 million per day which compares to an daily average of about US$2 million in 2019.
These improved levels of liquidity coupled with a sustainable weakness of the currency (though relatively mild) shows increasing levels of both demand and supply. Assuming that demand levels were stable and lower, this would result in the ZWL firming against the USD, as supply outruns demand.
We are, however, experiencing a scenario where the rate is depreciating but levels of allocations remaining firm, at least as reflected by the 100% allocation satisfaction rate. There are two things of note, demand would rise either because industry demand for forex liquidity is growing, which will be a positive as it reflects on growing production in the economy.
When production grows, average spend also increases, while GDP grows. We should also begin to see improved national production driven by agriculture after a good farming season, which would stabilise the currency.
The schedule for weekly allocation on the interbank shows a skew towards productive sector funding, again a reflection of the attempts to support sectors that drive national production. While this has been a positive, there are also headwinds emanating from increased local currency liquidity in the economy.
The growth is not emanating from base money creation, which is critically charged on the Central Bank. The levels of base money have been very stable, particularly in 2021.
Levels of credit creation through government’s utilisation of short-term debt instruments, whose rates are high, is worrying.
There is an attempt to sterilise the market through open market operations, which has an impact of lowering liquidity levels in the short term, while deferring the pressure to future years. Speculative moves around the stock market, where government has been an active player through the PSC Fund also contribute to rising RTGS liquidity levels.
Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — email@example.com