Forex bidders reject long tenured future deliveries

The most recent forward foreign exchange auction, conducted by the Bank of Ghana on Tuesday, once again reaffirmed the confidence of foreign exchange users and their banks who bid on their behalf that the cedi’s exchange rate against the United States dollar will remain stable over the next month and a half. The highest bid at the latest auction was GHc5.7625 to a dollar and this was for delivery in 15 days time.

Instructively the BoG refused it; the highest bid accepted was GHc5.7606, which was also for the delivery in 15 days time.

This will take the cedi’s stability into the second half of 2021, creating hopes that last year’s unprecedented exchange rate stability – made all the more impressive by the fact that it was an election year – will be repeated this year. However the bids made at the most recent forward forex auction ignored all offers beyond 45 days tenor indicating uncertainty about the fate of the cedi exchange rate beyond that tenor, unlike at previous forward auctions where bidders confidence expended to the longest offered tenor for future deliveries of 75 days.

Altogether there were bids for US$71.750 million, which was 2.87 times the US$25 million offered for sale by the BoG. There were 48 bids for delivery in seven days time, amounting to US$43.250 million of which the central bank accepted to sell US$11.500 million; 29 bids for US$19.750 million to be delivered in 15 days time, of which the BoG accepted to sell US$8.000 million; 12 bids for US$7.250 million for delivery in 30 days time of which the BoG agreed to sell US$4.000 million; and three bids for US$1.500 million to be delivered in 45 days time with all three bids being accepted at the bid prices offered.

However for the first time since the BoG began its forward forex sales in 2019, there were no bids for delivery of longer than 45 days – these being 60 days and 75 days respectively. This suggests that bidders are unsure about what exchange rate to expect two months from now. While some market analysts see this uncertainty as a bad sign, others are taking a more optimistic view, asserting that bidders may be expecting significant cedi appreciation and are therefore waiting to see whether it actually happens by which time they could buy forex on the spot market cheaper than what would be acceptable to the BoG currently at the forward auction.

The pessimists justifiably worry that the inability to do price discovery beyond 45 days could open the door for currency speculators to resume their old past time of taking speculative trading positions against the cedi (by buying up and hoarding dollars). This strategy is profitable because it creates an artificial scarcity of forex which in turn pushes its price upwards thereby enabling them make a profit when they eventually sell their holdings. However the BoG’s commencement of forward forex auctions in 2019 pulled the rug from under the feet of such speculators by indicating to the forex market what the exchange rate would be over various tenors into the future. But without such indicative rates beyond 45 days there is the possibility that the speculators will try to move in and fill the gap that has been reopened.

However part of the uncertainty can be ascribed to the unavailability of up to date data on Ghana’s external sector performance – the merchandise trade balance, the current account balance, the capital and financial account balance, the overall balance of payments, gross and net international reserves and the consequent import bill cover. The most recent data gathered will be released after the impending next BoG Monetary Policy Committee meeting, now rescheduled by one week and due to be held at the very end of the month. Currently, the forex market participants are working with data released in March, prior to the most recent US$3 billion Eurobond issuance which must have had a major impact on Ghana’s external sector standing.

The data is expected to be good if only because it will capture a rise in gross international reserves resulting out of the latest Eurobond issuance. Furthermore rising crude oil prices and the implementation of the US$400 a tonne Living Income Differential on cocoa exports should give Ghana’s merchandise trade surplus a boost after it narrowed in 2020.

Economists are hoping this will restore the confidence of forex users and the banks who bid on their behalf in exchange rate stability into the second half of the year as it would assure the market that the central bank has the capacity to intervene through increased supply of forex if necessary.