Interbank forex market weekly review

There is clear sustained exchange rate pressure in the economy. In other words, despite much hope, the exchange rate is yet to fully stabilise, if ever it will. The deduction is drawn from a number of observations made from movements in the exchange rate between markets, the volumes of trades in the formal market, the level of economic activity, money supply in the economy and capital market developments. An aggregation of the behaviours of these different variables and markets shows an exchange rate that remains generally weak and prone to shocks.

Respect Gwenzi

Financial ANALYST

We will look at each of the factors in this piece and help support our deductions. In the current week, the Zimdollar eased by 0,1% in formal trades.

There is clear sustained exchange rate pressure in the economy. In other words, despite much hope, the exchange rate is yet to fully stabilise, if ever it will. The deduction is drawn from a number of observations made from movements in the exchange rate between markets, the volumes of trades in the formal market, the level of economic activity, money supply in the economy and capital market developments. An aggregation of the behaviours of these different variables and markets shows an exchange rate that remains generally weak and prone to shocks. We will look at each of the factors in this piece and help support our deductions. In the current week, the Zimdollar eased by 0,1% in formal trades.

The decline, while marginal, is the widest in four weeks and takes the streak of sustained weekly losses to five weeks.

The lower bid has been more sticky when compared to the top bid. This means buyers willing to pay less have been more resolved and confident of supply than those willing to pay more.  In a normal market, especially when the exchange rate is moving in an adverse direction, we would expect the lower bid to move up more frequently than the top bid would move. Overall the Zimdollar has pared 3,39% over the last 4 months and 1 week, that is on a year to date scale. This is worse off compared to the decline suffered in the last quarter of 2020. The local unit depreciated by -0,43% in that respective quarter. The biggest takeaway in this week’s trading session is the level of interbank allocation. The total amount allocated surged to US$41,63 million, which is the highest allocation size since the interbank market was operationalised.

While this injection is in line with the RBZ target, it may be lagging the growth in economic activity. Supply chains disruptions, low disposable incomes and a recurring lack of capital investments are factors that are likely to drag production in the current year, hence influencing the Zimdollar exchange rate. Movements in local capital markets, which have since begun rerating upwards in May, shows a market that is continually anticipating currency instability and a market with limited instruments over which to spread investments. The stock market, as shown in 2020, has discounted potential movements in the exchange rate and thus rerating upwards ahead or in line with the currency depreciation. Since the beginning of May the ZSE is nearing 10% in gains and this movement is in line with the worsening parallel exchange rate.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net