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Demand for USD Dip at Forex Auction

February 25, 2021
thevaultzby thevaultz
in Securities/Markets
0
Demand for USD Dip Marginally at Forex Auction

The demand for United States Dollars (USD) ebbed marginally at the recent bi-weekly forward forex auction held by the Bank of Ghana, recording the lowest bid turnout since the start of the year.

A total of 66 bids worth US$54 million were submitted by banks for various volumes of dollars of which only 59 got accepted with an anticipated delivery from the central bank over 7, 15, 30, and 45 days respectively. This demand is way below previous auctions where an average of 100 bids were usually tendered.

However, this exceeded the Central Banks bi-weekly target amount pegged at US$50 million per forex auction for the first quarter of 2021 despite the low bids turnout. This shows some positive investor sentiment to buy US dollars in the foreign exchange market.

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It should be noted that the forex forward auctions are held to determine the allocation of a given amount of foreign exchange. This is done through a bidding process to control the inflow and outflow of the foreign currency in circulation in the Ghanaian economy. Also, Courage Martey, an Analyst and Chief Economist at Databank reveals that this helps to stabilize the local currency.

Additionally, the dollar amount of bids received in the foreign exchange auction against the amount sold i.e., the bid cover ratio fell to 1.08x compared to 1.96x at last time’s auction. This means that the worth of total bids made up 1.08 times the stipulated target set by the Bank of Ghana.

According to Will Kenton the bid cover ratio is an indicator of demand and a high ratio is an indication of strong demand. Thus, to obtain an accurate measure of demand, it’s necessary to compare an auction’s bid-to-cover ratio to the average of the previous 12 auctions.

The average bid cover ratio hovers around an average of 2.5 times for the previous auctions held. As such, a record of 1.08 times could be suggestive of a significant fall in demand for foreign exchange.

A breakdown of the auction suggests that 30 bids were submitted by banks for dollars to be delivered in 7 days’ time at a price ranging between GH¢5.72– 5.7950 but the Bank of Ghana accepted only 27 bids and prudently rejected 3 bids for this tenor at a price less than GH¢5.7350.

Dollars to be delivered in 15 days came next with banks submitting 23 bids at a rate of GH¢5.7– 5.8150. However, the Central Bank accepted only 19 bids within the rate of GH¢5.7350 – 5.7911. All submissions outside the stipulated average price were rejected.

Demand for USD Dip Marginally at Forex Auction
The Bank of Ghana

The bids for dollars to be delivered in 30- and 45-days’ time had only 8 and 5 bids submitted by banks correspondingly. All bids for both Tenors were accepted at a price ranging between GH¢5.7375 – 5.7625 and GH¢5.6950 – 5.76 respectively.

Banks, however, did not submit bids for dollars with longer delivery periods including those to be received in 60- and 75- days’ time. Also, for the first time this year, none of bids tendered were classified as invalid or null and void.

With most banks placing bids for dollars within the shortest delivery time on offer signals that although the markets are fairly confident of future supply, participants want the forex they will need for their operations as soon as possible.

So far, a clear observation of the cedi’s performance from last year remains impressive with nil rate of depreciation recorded last month. This goes to affirm Analysts’ predictions that the forward forex auctions will play an important role in the stability of the cedi.

Tags: # Cedi DepreciationBank of GhanaBanking sectorBanksBidsForeign exchangeForex auctionGhana CediUS dollars
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