Care now needed when rates stabilise

There is general agreement that the main reason the price of a US dollar has been falling over the past four weeks is that the commercial banks do not have enough uncommitted local currency to buy all that is offered on the wholesale auctions.

Once the price did start dropping then banks must also have been careful over just how much they would buy at each auction so they were not left with a pile of overpriced US dollars.

This is why the sudden doubling of purchases on this week’s Tuesday auction to more than US$11,5 million with another US$5,7 million yesterday suggests that the exchange rate is perhaps approaching the sort of level where banks may be predicting it might stabilise.

The banks have now all seem to have accepted that the sort of high price for a US dollar that some, who had stocked up on some rather expensive foreign currency earlier, was not sustainable in the present market, where more foreign currency is offered for sale in each auction that they can afford to buy.

This week saw the top bid in both auctions fall below US$5 000 for the first time since auctions started on June 7. The Tuesday auction saw a top bid of $4 900, plus strangely a few Zimbabwean cents, and yesterday’s auction saw this top bid tumble to $4 711,74.

The bottom bid that was acceptable did not move much, drifting down from $4 500 on Tuesday to $4 450 yesterday.

The bottom two bids on yesterday’s auction were rejected as being below the clump of bids from the other 11 banks. This has now been done five times although on Tuesday all 15 bids were within the clump of prices.

The weighted average yesterday fell to $4 537,4909 from the $4 771,3854 of Tuesday. This sort of fall, of more than $200 while the top bid fell by less and the bottom bid by just $50 suggests that more banks were closer to the bottom bid.

While banks are still some distance from achieving a consensus and reading the markets and fundamentals in roughly the same way, the gaps are generally starting to narrow.

Tuesday auction this week saw bids range between $4 500 and $4 900, a range of just under 9 percent, which suggests that the chief dealers in each bank are working on quite different ideas of where the exchange rate is likely to stabilise.

This was one of the auctions where all 15 banks that put in bids were able to buy, without some maverick seeking ultra-cheap US dollars being cut from the allotments because they bid too low below the general trends.

But yesterday’s auction was a lot tighter, at least after the bottom two bids were rejected as being too low from the general range, and the gap between top and accepted bottom bids was just under 6 percent, easily the lowest gap in the 12 banking wholesale auctions now held. Those gaps have been as high as 30 percent.

The bids this week and last week, coupled with the continued fall in US dollar prices in the interbank rates when auction results do not set this, and this has been happening since July 13, suggest that those banks that enthusiastically stocked up with whole US dollars priced at over $7 000 have sighed deeply and accepted their modest losses when they try to retail those same dollars to their business customers.

But when the top bid in the second busiest auction in all 11 that have been run since June 7 was for all practical purposes $4 900, the first time the top bid was below $5 000 even when the price of a US dollar was still rising, suggests that all banks have now accepted that a US dollar is worth less than $5 000. This was reinforced yesterday with the $4 711,74.

We still need to remember that the prices for the bankers’ auctions are wholesale prices, and banks would obviously like to add a bit of a mark-up to the wholesale price. With yesterday’s prices, it would now be difficult for any bank to try and sell a US dollar for $5 000, let alone more.

The major advantage of an auction is that it gives banks the opportunity to reduce the price of what they seek to buy. We would pressure that every bank would like to buy US dollars as cheaply as possible yet sell retail at some predetermined limit. But obviously some banks have ideas of where the exchange rate should be and hope that the banks bidding too low will be held to within 10 percent of their prices.

The other factor that is becoming obvious is the amount of local currency actually available. It seems that the decision to weld the taps at the Reserve Bank of Zimbabwe tightly shut, by moving the purchases of the surrendered 25 percent of foreign currency earned by exporters, to the Ministry of Finance and Economic Development has worked.

The Ministry cannot create or destroy money, and has to use holdings of local currency collected from taxes to buy the foreign currency from exporters, and immediately deposit that into the foreign currency Government account, so the purchase amounts to just a transfer between local currency and foreign currency accounts.

When banks buy foreign currency in an auction the reverse happens. The total holdings of the Ministry in its accounts do not vary at all, although the mix of Zimbabwe dollars and US dollars does.

Although there is now no creation of local currency, with even the banking sector not really expecting to have new loans at present interest rates, a balance will be achieved at some stage. The Finance Ministry has been keeping the pool of available currency at US$20 million for each auction, with a lot of left overs being topped up.

If that size pool is maintained, the cheapening US dollar will mean that banks, without increasing their local currency holdings, will still be able to buy more foreign currency so a higher percentage of the pool will be sold. If the Ministry lets the pool become a bit smaller that trend will accelerate.

The main trick that will be needed, to remove volatility, will be to let the rising purchases of US dollars move slowly towards the use of the full pool, without the sort of surge of the rejected bids that caused the US dollar to rise so drastically in price during June. It will need careful management by the authorities.

In a far more normal economy, this sort of thing is done automatically. The monetary authorities allow the price of a US dollar in local currency to drift up and down, but the avoid sudden wide swings by increasing the supply of foreign currency when the price is rising too fast, and restricting the supply when the price of the foreign currency is falling too fast.

Zimbabwe is still in a more interesting position where we are trying to discover just what the proper market price of a US dollar probably is, or at least a modest range of potential prices.

This goes beyond the calculation of what it probably should be based on the proportions of local currency and foreign currency in the market, and brings in subjective criteria, the subjective criteria of vast numbers of people who have seen far more volatility than most countries have.

This is the confidence factor. The rapid fall in the price of a US dollar over just over four weeks has introduced the concept that exchange rates can move in both directions, and that there is noting inevitable in the fall in value of the local currency.

There is still that annoying factor of the small black market, much smaller than what the banks now manage.

Here selling prices of US dollars are still on the high side, not so much because of intrinsic value or even demand, but because the myriad of small dealers bought a lot of dollars at $7 000 opr more and cannot afford to lose money, unlike the banks in the same boat which can.

In time the black market selling prices will fall, as the buying prices have done already, but even then it will probably be because of more cheaper dollars being bought to dilute the $7 000 dollars.

But there is still that position that some regard the black market as something sacred and perfect, rather than as a collection of hundreds to thousands of petty dealers with different prices.

The banking sector, of 19 commercial banks, is now the near perfect market, although the gaps between each banks rates is still a bit on the wild side, but then businesses can shop around and decide which bank will get their order for foreign currency.

That the banks have less local currency than they need to exhaust the pool and business with a decent deposit can make a deal with their bankers.-ebusinessweekly