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BREAKING: @CentralBankJA's F/X Sale of US$20M on Sept 1, 2020 only received US$7.8M in bids. In other words, of the total amount BOJ offered to sell to the market, the market only bought 39%.
http://www.boj.org.jm/uploads/news/b-fxitt_flash_sale_operation_1_september_2020.pdf
This is significant. I explain below.
#FinanceTwitterJa https://twitter.com/marcgayle/status/1300937961962430464
http://www.boj.org.jm/uploads/news/b-fxitt_flash_sale_operation_1_september_2020.pdf
This is significant. I explain below.
#FinanceTwitterJa https://twitter.com/marcgayle/status/1300937961962430464
First a brief summary of how the F/X market works.
Every day, buyers & sellers (i.e. Financial Institutions including Cambios) buy & sell foreign exchange with each other.
BOJ has begun publishing this activity daily, for example: https://twitter.com/CentralBankJA/status/1301268675522187265
Every day, buyers & sellers (i.e. Financial Institutions including Cambios) buy & sell foreign exchange with each other.
BOJ has begun publishing this activity daily, for example: https://twitter.com/CentralBankJA/status/1301268675522187265
That market activity is simply showing how much each financial institution bought from the market (each other) and sold to the market (each other) every day.
It doesn't show any transactions with BOJ.
BOJ doesn't do regular, daily, transactions with the F/X market.
It doesn't show any transactions with BOJ.
BOJ doesn't do regular, daily, transactions with the F/X market.
BOJ, occassionally, conducts 'Flash Sale Operations', i.e. whenever they believe that the market becomes too lopsided (i.e. too many buyers or sellers) they will intervene to do a one-off transaction of either buying or selling F/X.
It's not very predictable so that market participants can't speculate against the BOJ and just make money from speculating what BOJ will do every day or week.
Many years ago they used to intervene regularly and some market participants used to do that and make money.
Many years ago they used to intervene regularly and some market participants used to do that and make money.
To further combat speculation, they also began including provisions in the auction terms that specified that the funds have to go to 'End-Users'. More recently (since the crisis I believe), they included a limit on the spread (difference between their buy and sell price).
So that brings us to the results. So we know only US$7.8M worth of bids were received from the market (in other words, the market didn't need the full amount they had on offer), but how does this look relative to other auctions since the crisis started?
Glad you asked.
The figures below tell the story.
The chart:
- Blue bars show how much BOJ offers on that date.
- Orange bars show how much the market wanted (i.e. eligible bids).
- The grey line shows the subscription ratio of Bids to Offer.
The figures below tell the story.
The chart:
- Blue bars show how much BOJ offers on that date.
- Orange bars show how much the market wanted (i.e. eligible bids).
- The grey line shows the subscription ratio of Bids to Offer.
Anytime the grey line is above 100% or the Orange Bar is higher than the Blue bar, that indicates a shortage of F/X in the marketplace.
That is showing that the market would like to buy more than BOJ is selling.
Remember, BOJ only does this when the market...
That is showing that the market would like to buy more than BOJ is selling.
Remember, BOJ only does this when the market...
..isn't working properly to balance supply with demand. So the response to BOJ auctions is a good window into the sentiment in the F/X market.
In the table we can see the actual data of how much BOJ offers for sale and how much total value of 'Eligible Bids' they received.
In the table we can see the actual data of how much BOJ offers for sale and how much total value of 'Eligible Bids' they received.
So, all of this indicates to us that the F/X market is beginning to stabilize.
If market conditions continue as is, then BOJ won't necessarily need to do another Flash Auction as quickly as they have.
If they do, the subscription rate is not likely to be oversubscribed.
If market conditions continue as is, then BOJ won't necessarily need to do another Flash Auction as quickly as they have.
If they do, the subscription rate is not likely to be oversubscribed.
Another thing to note is that given the 7 operations they have done since April, $20M is the lower of the two amounts they have offered at any moment in time.
So the fact that the market only took up 39% of the lower amount is further indication that the market has enough F/X.
So the fact that the market only took up 39% of the lower amount is further indication that the market has enough F/X.
When you combine this with the news from New Fortress to repay their USD bonds early (i.e. they borrowed USD from Jamaican investors last year and are paying them back now rather than in 14 - 16 years like initially planned) is further indication... http://jamaica-gleaner.com/article/business/20200828/new-fortress-redeem-bonds-brokered-ncb-capital
that the F/X markets will have a lot of F/X in the near term.
So generally speaking, we can expect the JMD to continue to strengthen over the next few weeks.
I obviously can't predict the exact movements of the dollar, but just doing an analysis of the fundamentals...
So generally speaking, we can expect the JMD to continue to strengthen over the next few weeks.
I obviously can't predict the exact movements of the dollar, but just doing an analysis of the fundamentals...
leads me to believe that we will, generally speaking, see more strengthening in the near term.
If the JMD dips a few days in the near term, please don't tag me (lol) because I am making no guarantees that it won't. Just saying that the conditions are ripe for JMD strengthening.
If the JMD dips a few days in the near term, please don't tag me (lol) because I am making no guarantees that it won't. Just saying that the conditions are ripe for JMD strengthening.
Other greenshoots we are seeing is more and more companies are going to the equity markets to raise funds.
This will bring a lot of cash that is sitting on the sidelines out of caution, back into the equity markets, which should begin a rebound. https://www.loopjamaica.com/content/tropical-battery-plans-junior-market-ipo
This will bring a lot of cash that is sitting on the sidelines out of caution, back into the equity markets, which should begin a rebound. https://www.loopjamaica.com/content/tropical-battery-plans-junior-market-ipo
So assuming nothing MAJOR happens (i.e. an act of God or a significant world event like oil shock, or a crippling resurgence of COVID or major, horrible, policy decisions enacted) we could be at the 'bottom' of the recent 'bear run' in local equity markets.
That being said, we know that the GDP contraction in this year is going to be horrible, but based on the various economic indicators I am seeing it seems as if things could be stabilizing.
Btw, the reason this makes sense is simple supply & demand. If the market has enough USD supply and is flooded with more, then those that are holding USD and thinking of converting to JMD soon will sell sooner than later to get the best price they can. https://twitter.com/marcgayle/status/1301280054102630400?s=20
As they do that, that will push the price down.
Said another way, say I am sitting on US$20M and I know I will want to sell US$2M within 2 weeks. Also assume that the latest price today is $145.60.
Knowing that the USD is likely to lose value within the next few weeks...
Said another way, say I am sitting on US$20M and I know I will want to sell US$2M within 2 weeks. Also assume that the latest price today is $145.60.
Knowing that the USD is likely to lose value within the next few weeks...
it makes more sense for me to sell my US$2M tomorrow at say $144.90, rather than wait 2 weeks when I may only be able to sell it for $140.50.
That simple fact, will encourage profit-maximizing market participants to sell sooner than later, which causes the price to fall.
That simple fact, will encourage profit-maximizing market participants to sell sooner than later, which causes the price to fall.
