BoG’s FX strategy to keep cedi stable this year

Despite it being an election year – a period which is often characterised with a lot of speculation on exchange rate, thereby resulting in the cedi’s fast depreciation – the Bank of Ghana’s FX forward auctions calendar will help stabilise the local currency in the year.

What the FX forward auctions calendar seeks to do is simply reduce the incidence of speculation about the exchange rate. With this strategy, the Bank of Ghana (BoG) agrees with banks on a specific price it will sell the dollar to them within a certain period of time. What this means is that once banks are aware BoG will sell FX at fixed prices within the period, there will be no need of a mad rush for dollars by banks because of an anticipated loss or increase in value of the exchange rate.

And per the FX forward calendar, the central bank is ready to inject US$80million every month within the first quarter to meet growing demand for dollars within this period. This will mean, in every two weeks, US$40million will be injected into the economy to shore-up the currency. Thereafter, when demand is no longer high (after the first quarter), with the exception of June 2020, US$50million will be injected every month. Cumulatively, BoG will inject a total US$715million into the economy over the whole year.

Databank Research, in its Africa Quarterly Strategy Report, agrees with the position that the cedi will be relatively stable this year – given the BoG FX intervention discussed above.

“We are optimistic on the monetary policy support for exchange rate, but cautious on the fiscal side. We feel assured by the posture of the monetary authorities in maintaining a broadly stable Ghana cedi in 2020. Our optimism is grounded in the Bank of Ghana’s bi-weekly FX forward auctions, which will deepen forward trading and limit spot market pressures.

“We view the higher-sized allotments for Q1-2020 as reflecting the Bank of Ghana’s commitment to increase forward activities in Q1-2020, when seasonal pressures tend to shock the spot market,” the Databank research said.

Already, the cedi has shown a promising response to this intervention by the BoG – as for the first time in recent history, it appreciated against the three major trading currencies: the dollar, pound and euro. It appreciated by 0.3 percent against the dollar; 1.9 percent against the pound; and 2.3 percent against the euro in January 2020.

Compared to the same period last year, however, it depreciated by 2.6 percent against the dollar; 5.2 percent against the pound; and 3 percent against the euro.

According to the Databank research, besides the forward market interventions, it also expects intermittent forex sales on the spot market to limit short-term volatility; thereby forecasting the cedi to end the year with an interbank rate of GH¢6.05 to one dollar.

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