Bank of Jamaica goes after speculators

(Jamaica Observer) The Bank of Jamaica (BOJ) has launched a one-year bond it hopes will draw speculators away from the US currency.

Offering to sell the US dollar-indexed instrument cheap, which will carry a relatively high interest rate, the central bank said it aims to “prevent disorderly liquidity and reduce demand for US dollars as it offers an attractive alternative instrument for investors”.

The BOJ said that the excess demand for foreign exchange that has been reflected in the movement in the exchange rate is “overwhelmingly attributable to portfolio transactions and the early settlement of foreign obligations rather than an increased demand for imports”.

What’s more, it expects that uncertainty will be removed from the market, after the announcement of a pending deal with the International Monetary Fund (IMF).

Nevertheless, the US dollar-indexed bond, which was launched yesterday and which closes tomorrow, carries a 4.75 per cent coupon rate, can be bought at a rate of $J98.02 to US$1.

The weighted average buying rate — the rate banks would pay consumers for their currency — was $99.03 to US$1, while the selling rate was J$99.75.

At that rate, investors can actually convert currency, selling at higher rate and buying lower, according to Tracy-Ann Spence, NCB Capital Markets, AVP of Investments.

Indeed, using the weighted average, investors holding US dollars could get one Jamaican dollar off of every US dollar they sell and buy back into the BOJ bond.

Devon Barrett, manager, VM Weath Management, figures investors should not have the same appetite for the greenback as before.

All payments by investors on the bond and principal and interest settlement by the central bank will be made in Jamaican dollars.

Even then, the 10-day BOJ moving average selling rate — the rate consumers pay banks for US currency — on the date the bond matures will be used multiplied to determine the price investors will get, after that figure is multiplied by a factor of 1.003.

The BOJ estimated that the narrowing of the current account deficit in 2012, as imports, especially fuel, fell and epxorts rose, continued through to March, but Spence is cautiously optimistic, given that there is still “real demand for currency”.

“I don’t expect the dollar to come down to $98 to US$1,” she said.

Barrett was more optimistic.

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