By Andrew Green, Staff ReporterTHE JAMAICAN dollar appreciation achieved by a massive Bank of Jamaica intervention in the money market two weeks ago has been completely reversed.
Growing local demand for government bonds issued in overseas markets pushed the Jamaican dollar exchange rate to a new low against its US counterpart yesterday.
The average selling rate of J$53.88 to the US dollar represents a 40 cent depreciation from the exchange rate on Monday. The average buying rate was J$53.63 to the US dollar.
"It went as high as J$54 in trading," said Lissant Mitchell, assistant vice president for the treasury division at Pan Caribbean Merchant Bank. The market is
faced with an unusual situation where there is firmness in both the foreign and domestic markets.
"I have never seen it like this," he said.
The fall has occurred because bad news about the Jamaican political and economic situation has caused some overseas bondholders to reduce their holdings, money market specialists say. The resulting fall in prices has in turn stimulated Jamaican investors to pressure the foreign exchange market for US dollars to acquire the cheaper bonds.
The situation is highly unusual combination of events, said Paul Gray, Jamaica Money market Brokers Limited fixed income trader.
The Bank of Jamaica introduced a special five-month open market instrument offering an interest rate of 30 per cent per annum on March 10. That attractive instrument pulled funds from the foreign exchange market as well as other local Jamaican dollar investments, resulting in an appreciation of the Jamaican dollar.
Though the instrument was withdrawn five days later, it absorbed $7 billion in funds from the market and sufficient new liquidity has not yet returned to the market to replace that.
While this was occurring, overseas investors in Government of Jamaica bonds were getting bad news about the state of the economy and problems faced by the Minister of Finances as well as the threats from the Opposition.
"Foreign investors are very risk averse," said Charles Ross, chief executive of Sterling Asset Management Limited. Some reduced their holdings of the bonds and prices fell.
The subsequent depreciation of the currency has been caused by nervous overseas dealers insisting that Jamaican bond holders to fund a greater proportion of their holdings, bought on margin. Investors can make part payment on a purchase, but where prices have fallen, the dealers may require payment in full.
Knowledge that overseas dealers could sell their positions if they do not have the currency to back their purchases has cause a rush on the market as local investors bought US dollars, Mr. Gray said.
But the selling of Jamaican bonds by overseas investors has also driven down prices, Mr. Gray said. This has created "the atmosphere for a bull market," as Jamaican investors grab the new bargains.
The additional purchase of bonds by Jamaicans has created extra demand for foreign exchange, Mr. Gray said.
Foreign bond prices appear to have stabilised, Mr. Ross said. "I suppose right now the market is waiting to see what happens with the budget."
