Interbank forex market weekly review

The interbank foreign currency market continued to charter stably, partially recouping value in the latest auction on Tuesday. The local Zimdollar which has been effectively liberalised to the USD since the second half of 2020, through the auction system closed at 84,480 up from 84,483. Before the current week’s recovery the local unit pared in nine straight sessions, but the degree of losses has been very minimal and stable.

By Respect Gwenzi

Over the nine-week period the Zimdollar has shed 1,3% only, which is commendable in relative sense. In its first 10 weeks of trading in June 2020, the Zimdollar lost a cumulative 36,2% as the currency struggled to hold against the greenback.

Year to date, the Zimdollar has lost 3,2% which, after considering the aforementioned latest 10 week decline, shows a declining rate of currency depreciation.

The chart shows a historical computation of interbank rates per session since January. It shows the highest bid level per each session, the lowest bid and lowest acceptable bid level. The lowest acceptable bid level is the threshold considered for purposes of allocation.

The chart, more importantly, shows the weighted average rate. This refers to the rate arrived at after considering each buying point in relation to volumes of trades.

The chart shows that the top bid, which has been stable over the eight weeks before the latest auction, pushed upwards to 88 from 87.

A rising top bid reflects that some of the buyers were willing to pay more for a dollar of forex than they did last week.

The rising top bid may also reflect on tightening demand. however other matrices would have to be considered and these include lower bid and weighted average exchange rate. The mid rate slight appreciation in the week under review counters the fears ignited by the rising top bid. The lower or firming rate highlights that there was sufficient liquidity at stable levels.

Both the lower and lower acceptable bids were stable in the week under review. A rising lower bid reflects on tightening demand, similar to a rising top bid. The aggregate has been performing stable since February 2021.

Further review of the data shows that cumulatively the auction system has supplied US$517,08 million since the beginning of the year. This deduces an average weekly allocation of US$34,5 million per seven-day week and a daily average of about US$4,9 million. Assuming a five-day trading week, the allocation would deduce to US$6,9 million weekly allocation.

For 2019, RBZ reported that daily allocations for a five-day week averaged US$2m. This means average supply (trade) levels on the interbank have improved by about 300% between 2019 and 2021. 2019 is significant in that, it is the year the government undertook currency reforms which consequently ushered in the Zimdollar. As a follow up, a forex market was officially unveiled but with significant influence from the RBZ resulting in distortions and mispricing of the currency.

Consequently, the market did not attract sufficient trades, hence the low trading activity levels. In turn the low flows hurt industry as companies failed to import critical raw materials and capital goods. The net results reflected in a GDP decline of -10% and a low capacity utilisation.

From a dip two weeks ago, the levels of interbank weekly allocations have been slowly recovering.  In the week under review, total allocation came in at US$34,1 million from US$32,9 million last week.

The lowest weekly allocation since January was in the week beginning April 6. An allocation of US$25,3 million was made which compared to a year-to-date average of US$34,5 allocation per week.

The level of trading activity is important in that it reflects the interplay of demand and supply of foreign currency and the resultant equilibrium level.

When demand is low net flows represented by allocations also come off. More importantly low demand given constant supply levels would drive the weighted average exchange rate downwards.

The interbank has been hailed as having calmed the inflation havoc, while also helping companies access forex for importation of raw materials and settlement of foreign obligations. These are significant positives as production in the economy has begun to pick up and aggregate demand is improving. Companies are reporting volumes recoveries, some of which are double digit.

Zimra reported revenue out performances in successive quarters since Q3 of 2020 reflecting higher sales and collections. All this has largely been attributed to a more organised interbank exchange.

We commend these developments and believe that they could be capitalised on to further cement economic recovery and market efficiency.

However we are of the view that sustainable stability is yet to be reached. The currency premium on the parallel market is too big to ignore. It posits a threat to price stability in the economy. It also increases chances for arbitrage where some players with access to the interbank may access cheaper forex and “burn it on the streets” in cycles.

The huge gap calls for the RBZ to be more vigilant with exchange control. Outside of that, the gap may reflect some underlying challenges with the main market.

It reflects that the market although pushing higher volumes may be far from efficient. The higher surrender portions, high information of the economy, weekly instead of daily auctions may all be driving forces weighing on the balance.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — This was first published by here the Zimbabwe Independent.