A year of currency war: StanChart
The year 2010 was a tumultuous year for the global economy, but Bangladesh emerged stronger, registering solid growth and boasting robust FX reserves, Standard Chartered Bank said in an annual market roundup.
“The local financial markets saw increase in volumes and activity and quite a few landmark developments,” it said.
Last year will be remembered for the currency wars, European debt crisis, and its subsequent impact on Euro. In the meantime, Bangladesh hosted its own currency market that started on a slow note, but picked up later and kept traders and banks on their toes.
USD/BDT levels were steady for the first half (H1) of the year, averaging around 69.27 in inter-bank trading for the January-June period. Trading volumes were $13 billion in H1 2010, lowered by $1 billion compared with H1 2009.
The local inter-bank FX market totalled over $28 billion during January-November and the dollar-taka market accounted for 19.2 percent of the monthly trade volumes averaging $491 million a month.
In the second half of 2010 (H2), dollar/taka levels shot up as a number of factors saw the greenback appreciating against taka. Average monthly inter-bank FX trading volume stood at $3.6 billion, increasing from $2.2 billion in H1.
The fundamental factor contributing to the increase in volumes was higher trade levels, as both imports and exports increased during H2, StanChart said.
“While these factors accounted for the higher volumes, high demand of funds in the markets due to business and trade requirements coupled with major dollar payments due on the part of the banks created an upward movement in the USD/BDT levels,” said the report.
Near the end of 2010, the market has been characterised by a high demand for the dollar, while a shortage of BDT in money markets coupled with the high call money rates led to a unique situation where there is a significantly high demand for both the dollar and the taka.
Healthy remittance levels helped ease the stress on taka depreciation; however, remittances receipts during July-October decreased by $32.6 million, nearly 1 percent less than the same period of 2009.
With the dollar/taka rate remaining stable for the preceding few years, demand for hedging products on the import side was negligible, rather exporters took advantage of the dollar/taka interest rates to earn premium by selling their export proceeds in the forward market. There had been hedging activities in currencies other than the dollar, with the volatility in Euro, pound, and Yen convincing clients to mitigate those exposures.
According to the report, the latest financial innovations were forwards, range forwards, and seagull structures, which are allowed by the central bank, although the volume of such deals transacted are still low.
The increased activity in the local forex market can be interpreted in a number of ways -- while volatility can bring new challenges for the market players, it also brings new opportunities for the same players to learn and grow on the path of local market to become a more matured. The outlook for Bangladesh is promising; forecasts suggest that the Bangladeshi economy will continue to grow strongly, with strong reserves and increased FDI, the report predicted.