The results of the first of the 24 forward foreign exchange auctions scheduled by the Bank of Ghana for 2021 indicate that the local forex market remains confident that the cedi will hold its own against the United States dollar at least through to the end of the first quarter of the year.
Altogether there were 136 bids for various volumes of dollars with delivery from the central bank expected over 7,15,30,45,60 and 75 days respectively. The highest bids came for delivery in 30 days time, at a range of Ghs 5.8050 – 5.900 and the BoG prudently rejected bids for this tenor of over Ghs 5.8600. However the single bid for delivery of $500,000 in 75 days time – the end of March – was placed at Ghs 5.7850
Considering that the a dollar currently sells on the interbank market for about Ghs 5.7832, the range of bids for delivery of dollars through the first quarter of this year suggests that forex users and their bankers do not expect any significant depreciation over the coming two and a half months at least.
Altogether the BoG put up $50 million for sale out of the $775 million it intends to sell in 2021 through forward auctions. Unsurprisingly total bids were 2.76 times the amount offered, with most of the bids placed requesting for the shortest delivery times on offer, which warns that although the markets are fairly confident of future supply, they want the forex they will need in their coffers as soon as possible.
There were 51 bids for delivery in seven days amounting to $63.25 million of which $22.5 million was granted at rates ranging between Ghs 5.8200 and Ghs 5.8325 This was closely followed by the 50 bids for 15 days delivery of a total of $49.5 million of which $15.75 million was actually sold at rates of between Ghs 5.833 and Ghs 5.855.
Curiously the highest bid came for 30 days delivery, with at least one bid reaching Ghs 5.900 although was most likely an aberration rather than part of a trend as it was not repeated for any other tenor, even the longest on offer. Importantly the BoG used this opportunity to send a warning to the market that inordinately high bids will not be countenanced; it only accepted nine of the 22 bids made for this tenor ranging between Ghs 5.826 and Ghs 5.860, selling $6.75 million out of the $17 million demanded.
There were nine bids for delivery in 45 days of which five were accepted, selling $3 million at a range between Ghs 5.806 and Ghs 5.835. For delivery in 60 days all three bids made, cumulatively demanding US$1.5 million were accepted at a price range of between Ghs 5.782 and Ghs 5.800.
Indeed, both the number of bids and total amount requested declined in inverse correlation to the delivery tenor culminating in just one bid for 75 days delivery of $500,000 which was also accepted fully.
This implies that government has passed a litmus test; in recent years in particular the most intense pressure on the exchange rate has tended to come during the first quarter and indeed in 2019 the cedi was the worst performing currency worldwide of 149 tracked by Bloomberg during the first quarter before recovering subsequently. This is in part why government is seeking to do a Eurobond issuance of possibly as much as $5 billion as early as possible this year.
However since the BoG astutely introduced forward forex sales in late 2019 to improve price discovery, the resultant bids have neutralized the efforts of currency speculators who tended to take positions against the cedi for short term profit.
Now macro-economic fundamentals primarily determine the cedi’s exchange rate and with Ghana running a trade surplus consistently since the last quarter of 2016, and gross international reserves having been built up to a long term high of over $8 billion since 2019, those fundamentals are better than ever.
Altogether the BoG has allocated $775 million for sale this year through its forward forex auctions, which were introduced in September 2019 and have since been outstandingly successful in stabilizing the exchange rate.
As it did last year the BoG is front loading its sales in order to build up confidence among forex traders and users right from the beginning of the year and thus stem speculative – and consequently inordinate – demand for forex through the year.
In line with this tried and tested strategy the central bank will offer $50 million during each of the two auctions per month in January, February and March respectively, and then $25 million at each of two auctions in April and May respectively. It will then offer $25 million per auction at each of three auctions in June, two in July, August, September and October respectively, three in November and one in December.
The results of the first forward forex auction for the year puts paid to Trading Economics forecast of a gradual but marginal depreciation of the national currency. It had projected that the exchange rate will rise to Ghs 5.92 by the end of the first quarter of this year, Ghs 6.03 by mid-year, Ghs 6.14 by the end of the third quarter and Ghs 6.25 by the end of 2021 as a whole.
However, last week’s auction results suggest that the exchange rate may not exceed Ghs 5.85 to the dollar by the end of the first quarter unless a supply crisis emerges on the spot forex market. But this is highly unlikely what with Ghana’s sturdy gross international reserves and expected multi-billion dollar inflows from the impending Eurobond issuance.
