Policy adjustments curbing artificial FX demand: Report
Research firm IH Securities in its latest Macro Economic Update, highlighted that there was a cooling of foreign premiums on the parallel market as the central bank reins in speculators.
Although this is largely explained by increasing actual demand for foreign exchange as the private sector boosted production to satisfy demand and raised expansion CAPEX, IH Securities noticed anecdotally that the current account surplus since last year has not translated to a strengthening local currency.
According to IH Securities, since mid-July, the premium on the exchange rate has decreased from approximately 102 percent to the current 49 percent, while the parallel rate has decreased from US$1: $790 to US$1: $720, according to IH Securities.
“Recent policy adjustments have been effective in curbing artificial forex demand driven by speculators and arbitragers,” IH Securities said.
To eliminate the arbitrage created by “cheap funding,” the bank policy rate was increased from 80 percent to 200 percent per annum, bringing borrowing costs closer to inflation.
“This reduced borrowing of funds for speculative purposes. Going forward, the Reserve Bank of Zimbabwe will be reviewing interest rates in line with developments in monthly inflation.”
The money market has been dry of ZWL for days now, prompting parallel market rates to subside downwards. Surprisingly, bond notes are now trading at 700x to the US dollar.
Another research firm, Old Mutual said, “Gold coins could ease pressure on USD demand (for store of value purposes). Local dollar subscription could help to mop-up liquidity, as well as counter inflation and currency depreciation on savings.”
Old Mutual also noted that local dollar subscriptions will be most effective if the official exchange rate is closely aligned to alternative market rates to mitigate destabilizing arbitrage pressures.
“Integrity of the gold coins (content verification and reconciliation of certificates with coins) is crucial to support market confidence, from an arguably low base.
“Downside risks centre on trading mechanics, transparency and market conduct, variables which are still mostly outstanding,” the research firm concluded.-ebusinessweekly
