HomeAnalysisDownward spiral of exchange rate to continue

Downward spiral of exchange rate to continue

The auction market conducted its third session of the year this week.

The direction of the exchange rate remains unchanged and it is likely that the downward spiral will be sustained.

The best bet is that the margin between the auction rate and the parallel rate is reduced at least to levels of about 50% from current levels of about 75%.

However this too is not a stroll in the park.

During the week the Zimdollar lost 1,05% against the United States dollar.

This was the narrowest weekly loss since the beginning of the year.

The loss however takes the cumulative year to date to 7% and when compared to the same period last year, the current year loss is way too wide.

In the first three trading sessions of last year, the auction market cumulatively lost 1,1%.

Interestingly, the wider loss in the current year is pivoting a wider off parallel market premium of 72%, compared to an almost half premium of 35,2%, at the same time last year.

What this micro analogy shows is that the auction rate is likely to continue depreciating at higher rates until parallel rate premiums narrow down below 50%.

In the interim, we are therefore likely to see sustained interbank exchange rate depreciation of higher than 1% per week, until the gap between the two markets is narrowed

Apart from the average exchange rate movement, the top bid moved up to 133 which is 16 points up on the average exchange rate.

This compared to a prior week margin of 15 points.

Incorporating the lower rates into the mix, the lowest accepted bid moved to 113 which is narrower by five points compared to last week.

These two readings suggest that the weighted average exchange rate should move further down, at increased rates over the next three sessions.

This indicator is in line with the first one relating to the current rate of depreciation vis-à-vis the parallel exchange rate, as highlighted in the first paragraph above.

While other fundamental considerations such as money supply levels are influential in determining the future possible outcomes of the market, the above technical indicators are very informative as they capture the behavioural aspects of the markets.

The total liquidity dispensed on the auction market partially reduced by 3% to US$37,5 million from US$38 million in the prior week.

The average weekly flows so far this year lags the 2021 full year average weekly allocation levels of US$40 million.

In 2021, the auction market conducted 49 sessions, over which a total of US$1,97 billion was dispensed.

There was a fair distribution of the allocation between the first and second half period of the year.

Compared to auction market allocation in the second half of 2020, the second half allocation of 2021 amounting to US$0,98 billion was 58% better off.

This statistic is in line with the growth in imports in 2021, which was recorded at 120% over the prior year.

The imports outturn is largely a result of higher oil prices on the global market, stimulated by improving local demand as industry reopens.

This week oil prices reached a four-year high which means further higher import costs. Energy imports, at some point accounted for 25% of total imports into Zimbabwe.

The analysis of whether the auction market is working or not dominates the present day economics discourse of Zimbabwe.

The authorities have concluded that the auction is the best foot forward for the country in its quest to spur economic growth.

The government has highlighted that industry redemption has been motivated by the market while stability has also kicked in on the monetary front.

The underlying views are worth noting.

It is true that industry has largely benefited from a more organised foreign exchange market.

The current auction market is better than the forex queue of yesteryear or the highly controlled market of 2019 to mid-2020.

There is a semblance of balance on the payoffs but of course the downside is as important to highlight.

The auction market is primarily meant to distribute foreign currency liquidity through a free market mechanism driven by the forces of demand and supply.

In the present instance, the market has a dominant player on the supply side, who can easily fix the market and this player is the RBZ.

To achieve a more efficient market, the RBZ should not be a player but rather a referee on the interbank.

Its role should be that of setting rules and making sure that these rules are adhered to and that the rules achieve optimum results.

The RBZ leverages its sheer muscle, from funds earned from the surrender portion to drive the market in its desired direction.

But the direction has been one sided, which means what the Bank has been doing is to suppress the auction rate from a drastic fall.

Why would the rate fall if the economy is fundamentally sound? It is not conceivable that the currency would sustainably fall when the economy is very stable.

The wartime depreciation rates as are being experienced in Zimbabwe can only be achieved if the economy is in bad shape.

There is either no truth to the data that RBZ is publishing relating to government borrowing from the central bank or the money the central bank is injecting into the financial system, or a great deal of the economy is backsliding.

Either way, there is a direct relationship between the performance of the currency and the economy otherwise there is typically no need for intervention to the levels that the RBZ is doing on the currency market.

The bank is exchanging the 40% earned from exports at rates that are 75% below the parallel market.

While the parallel market exists elsewhere in the world, that of Zimbabwe is significant in that it is a major driver of prices in the economy.

The country’s informal market sources merchandise using US dollars or cross rates and these inform the prices quoted elsewhere.

As a consequence, exporters are bearing the brunt to the tune of 25% loss on income from exports receipts.

On its part the RBZ, amasses sufficient funds to pay the market and not necessarily stabilise.

In the absence of foreign currency reserves, it is extremely difficult for the RBZ to stabilise the market on a sustainable basis.

The country will need to craft newer policy measures that fully stabilise the currency market and these policies should be free market driven.

At present there is significant arbitrage by all and sundry.

Most are accessing auction funds without successive acquittals and the business of forex is now one of the most highly rewarding in the land

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

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