HomeOpinionEquity Axis View: Understanding the curious forex auction rate wide loss

Equity Axis View: Understanding the curious forex auction rate wide loss

THE exchange rate fell by 3,2% in the latest weekly auction, by far its widest margin since the beginning of the year. Not only is it the worst performance since the beginning of the year, but it is also within range of the average 10-week loss between June and September 2020.

The reference period is significant in that it marked the first 10 sessions of the auction market, following what was a revamp of the Dutch auction market. The period was thus viewed as a market discovery period characterised by wide swings and sharp losses.

Post the 10-week period, the official exchange rate began to stabilise, with flows improving and market confidence increasing. This week’s wide-loss, follows another record setting loss in the prior week.

In our view, these movements are clearly calculated. We believe the Reserve Bank of Zimbabwe (RBZ) is allowing for wider loss, in a bid to quietly close the gap between the official and the parallel rate.

The huge gap between the two rates now seen at about 90%, highly incentivises rent-seeking and arbitrage in the economy, with catastrophic consequence of derailing the touted economic recovery. The top bid on the main auction moved to the psychological 100-mark, for the first time. All other bids, these being the lower bid and the lower accepted bids all moved up ahead of their prior levels.

The chart shows below quicker growth in both the top and lower bids, a sign that the market is chasing higher valuations for the dollar. As highlighted earlier, the movement in the average exchange rate, shown, reflects the sharpest loss since the beginning of the year.

Further and of significance, is the allotment rate, which came in at 86% of total bids. This means that 86% of total bids submitted received allocation. From the chart, it reflects that the lowest rate and the lowest acceptable rate are now at variance, breaking a trend of parity stretching over eight months.

The divergence between the lower accepted and lowest bid is a reflection of an iota of market mechanics at play, where there is at least an indulgence on supply and demand fundamentals.

The RBZ has indirectly accepted that it has been allocating funds on the auction market that it does not have. By so doing, it kept the rate suppressed, which is beneficial for its cause as the monetary authority responsible for price stability in the economy.

However, the downside of this undertaking also reflected in huge outstanding balances, stretching over one and a half months. At one point, the Bank had a backlog of almost US$200 million, part of which has now been ringfenced and is being gradually cleared.

The RBZ has come out saying it is now committed to re-aligning the market and sell only as much as it has earned. These revelations have an impact on market confidence and further exert pressure on the parallel market and premiums prevailing in the market. To restore market trust, the bank has to improve on its transparency and further liberalise the exchange rate.

A total of US$47,88 million was allocated in the week under review. The allocation level represents a 31,6% growth over the prior week. On average, the auction market has allocated US$43,7 million a week over the last 10 weeks.

In the first year, the auction market exchanged US$1,5 billion, which represents 30% of all foreign currency payments. Cumulative auction market trades since June 2020 are at US$2,13 billion (September 2021).

The figures in terms of auction market contribution to total payments shows that the market discovery in the present instance is conducted on barely 18% of the total forex flows, given that the Bank accounts for about 40% of the total auction flows.

Latest figures from the RBZ shows that there are efforts to mop up excess liquidity, but the market is already in panic as shown by the huge movements into stocks, largely for purposes of hedge-seeking.

Clampdowns will only slow down the movement while the auction rate catches up, but it is not envisage that official rate will come closer to trading at 40% discount to the parallel rate.

As we go into the festive, our expectation is that the parallel rate will continue to widen its gap, sweeping past the 1:200 mark in early December.

Equity Axis is a financial media company, specialising in financial research, broadcasting and publishing economic and business updates.

  • Equity Axis is a financial media company, specialising in financial research, broadcasting and publishing economic and business updates.

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