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Currency market review

By Respect Gwenzi

Market indications show that while stability is prevailing on the interbank, the variance between the interbank and the parallel rate is widening and therefore creating serious room for arbitrage and market distortions.  This gap had so far had the consequence of driving informal economy prices up and this makes a significant portion of the retail sector. Ignoring this variable and concentrating only on growing the nostro position is dangerous. It raises the risks of expropriation over the midterm once the government starts to see its exports plunging and the rate tumbling sharply on the interbank.

There is ready arbitrage going on through the bureaux de change who are now reporting a sharp demand for funds even for travel purposes. In May one could easily walk in a bureau and access funds for travel but three months later there is now a long queue stretching two to three weeks even though the rate of travel of number of carrier flight has not increased. In essence some elements collaborating with bureaux are collecting passports from non-travellers and taking same for stamping in exchange for US$50. They in turn earn 500 from the bureau at the interbank rate and sell the 450. They earn almost 90% by selling it on the parallel market. These matters are of concern as they undercut the exporters. Gradually exports slow down and the economy faces serious stability challenges

Activity on the interbank market slowed down for a second consecutive week, easing from record high allotments recorded in August 24th central bank trades. With US$37.5m worth of accepted bids received this week and a marginal rise in the lowest bid accepted for allotments, the weighted average rate edged lower this week but remains in the 1:86 range (formally) for another week.

Based on historical trends, it could be another fiscal quarter before bidders see the exchange rate exiting its recently entered trading band.

For patient companies and individuals prepared to wait-out requested forex supply delays, they may continue bidding within the informally cemented 82-93 bid range, extending their opportunity to access relatively cheap foreign currency.

Weekly auction data reveals a demand-induced upsurge in the weighted average rate, clawed upwards by a relatively steady lowest accepted rate and fluctuating Highest Rate on the market.

In the week under review, the upper bid flatlined but the lower rate inched up from 83 to 84, leaving the headline rate 86.21 for the week.

The central bank’s auctions are yet to sustain a consistently tight variance between upper and lower bids, an indication that interbank stability has not been reached yet. Unlike global currencies or the ZW$’s regional peers, US$: ZW$ exchange rate movement do not appear to behave in response to broad macroeconomic influence. Without eyes and ears on the ground, understanding and piecing together local exchange rate dynamics is a guessing game.

Although the currency pair have traded at a rate evidently more stable than historically recorded levels, doubts remain concerning the true market value of a US$ in terms of ZW$.

Year-to-date ZW$ depreciation on the interbank market stands at 5.43%, a devaluation in stark contrast to an estimated 50% depreciation in the local parallel market. Similar to the formal exchange rate system, underlying drivers of parallel market movement are (arguably) not set in stone. Although limited geographically to personal and shared experiences, we propose the idea that parallel market rates are (also) a cumulative result of speculative and often predatory individual transactions with profit-oriented intentions.

Based on such an operating base, fair-market exchange is sidelined and the trading party with a transactional upper-hand takes advantage of information and resource asymmetry, either adding on to or marginally reducing quoted exchange rates in the informal market.  To a certain extent, one could argue that an immediate to medium term remedy could be timely availability of foreign currency through formal money markets. Convenient and cost-friendly availability of foreign currency would go a long way towards dampening parallel market appeal and influence over time as arbitrage opportunities are narrowed by above-board and formalised currency exchanges.

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

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