Samuel Braithwaite | The Jamaican dollar at 158

On Thursday, August 8, 2024, the average sell rate for one US dollar surpassed $158 Jamaican dollars. The following day, August 9, I posted the following message in a few WhatsApp groups of which I am a part: “I think we will see some serious interventions in the next five business days. Any bets?”

On August 9, the average sell rate fell below $158 to the USD. On that day there was no flash intervention by the Bank of Jamaica, BOJ, in the market, however total purchases of the US currency by selected authorised dealers (commercial banks) and cambios surpassed their total sales by a tidy sum of approximately US$10 million (let us call this net purchases or net supply). This net purchase was equivalent to 14 per cent of total purchases for August 9.

It is useful to think of the purchases by authorised dealers and cambios as the supply of US dollars to the market, while their sales represent the demand for US dollars. As an example, when an authorised dealer sells US dollars to Jamaica Public Service Company that is equivalent to the demand for US dollars by JPS to pay for its fuel and gas imports.

Is there anything special about the current interventions? Why was I confident about interventions during the week of August 12 to 16?

Daily information provided on the BOJ’s X page showed many days when the demand for US dollars in the market exceeded the supply. Elementary economics says that when quantity demanded exceeds the quantity supplied then there is going to be upward pressure on price. Additionally, based on the BOJ’s actions in the foreign exchange market dating back to early 2022, I expected flash interventions to ease the pressures.

The BOJ effect

Flash interventions by the BOJ are quite normal and occur for a few days each month. What differs from time to time is the value of the interventions which range from US$20 million to US$40 million.

From August 12 to 14, the BOJ pumped a total of US$90 million into the market through flash interventions: The average of US$30 million each day amounts to about 35 per cent of the average daily value of US dollar purchases by authorised dealers and cambios for the period.

The graph on this page shows the exchange rate going back to 2022, the year when the currencies of 90 countries depreciated against the US dollar. Due to consistent interventions, the BOJ has ‘defended’ the Jamaican dollar. Indeed, in February of 2022 the average sell rate rose to $158, fell below $153 by December 2022, and returned to $158 on August 8, 2024. Is $158 the new norm? Time will tell.

I am not privy to all the information which dictates the demand and supply for foreign currency at any given time, especially as regards the demand side. Indeed, the Jamaican foreign exchange market is relatively small so one major transaction can cause a major difference between the supply and demand on a given day.

However, we can expect increases in the demand for foreign currency post hurricane Beryl. Indeed, building materials and basic raw materials needed to restart production in the agricultural sector will have to be imported; imports which will have to be paid for in foreign currency.

Further, these demand pressures will be compounded by the usual increased demand for foreign currency to pay for imported back to school supplies and summer vacations.

In recent weeks there has been much chatter about a slowing down in economic activity in the American economy, and with such chatter comes the concomitant expectations of a lowering of the US policy rate, the Fed funds rate, sooner than was previously expected.

The American effect

Generally, a lowering of the US policy rate, which results in a lowering of other US interest rates, leads to a weakening in the value of the US Dollar against other currencies. A simple way of under-standing this is to think of the interest rate as the return foreign investors receive when they hold US financial assets – assets they have to purchase with US dollars – so with lower interest rates, US financial assets become less attractive to foreign investors who then move their money into other assets, such as gold.

Gold is currently trading at a 30-year high and climbing for reasons which I think are linked to the global ‘polycrisis’, reasons such as the push back against globalisation which has led to Brexit and the election of Donald Trump. A weaker US dollar will contribute to higher gold prices.

With lower interest rates we can expect an uptick in US economic activity and incomes. This in turn means that remittances and tourist arrivals into Jamaica are likely to remain relatively stable over the coming months.

Further, with a healthy stock of net international reserves of approximately US5 billion, the BOJ can continue its interventions. However, one major hurricane can potentially blow the exchange rate past $160.

Dr Samuel Braithwaite is a lecturer in the Department of Economics, University of the West Indies, Mona. He is also a technical consultant at Growth Perspectives Limited.|samuel.braithwaite@uwimona.edu