US dollar gains on political uncertainty Colombo shares see low foreign buying

The US dollar hit dizzy highs this week against the rupee due to demand from mostly foreign banks amidst a likelihood of the Central Bank (CB) intervening in the market to stabilise the local currency.

The demand for dollars was not to feed imports but based on an exit by foreigners from stock and debt portfolios owing to political uncertainties in Sri Lanka and expected US Fed rate cuts this year.

The rupee hit an all-time high of Rs. 158.50 on Wednesday and then eased to Rs. 157 per dollar on Thursday.

There appeared to be less pressure on the dollar on Friday morning after reported comments by CB Governor Indrajit Coomaraswamy to reporters on Thursday, in an event to mark the release of the banking regulator’s 2017 annual report.

The Governor’s view that the CB has enough ‘firepower’ to deal with pressure on the rupee “implied that the rupee won’t be permitted to deteriorate further,” one money market dealer noted.

“There is no reason for the rupee to be under pressure. Even if it does come under pressure we have the firepower to ensure that the currency maintains its fair value,” the Governor was quoted as telling reporters. He did elaborate on what these steps would be.

However, the possible stabilisation of the rupee was short-lived later on Friday when the dollar began climbing again, gaining to Rs. 157.40 and onwards at Rs. 157.85 levels by around 3 pm.

“The demand seems to be rising and that’s why the market is reacting even though banks believe some intervention in the market may happen, eventually,” the dealer said.

The CB hasn’t intervened – pumping in dollars to keep the rupee down when there is a shortage of dollars – since January 2017. At that point the banking regulator had been intervening in the market whenever the dollar reached Rs.153.

“We see money going out of equity ( stocks) and debt markets and when these rupee sales happen, this has to be converted to dollars to be sent out,” the dealer said.

In the absence of intervention, the CB has resorted to ‘moral suasion’ (gentle persuasion) - instead of issuing any direction - to banks found pushing the US currency up.

Colombo shares amid continued political uncertainty have seen low foreign buying with some analysts saying that the situation seems to be going down without any remission in sight.

There's no support to the market in terms of policy or concessions which is causing this, stockbrokers said.

Foreign investors bought shares worth Rs.1.7 billion this month (as at April 27) compared to Rs. 10 billion in the same 2017 period. Colombo's share market is desperately calling for political stability and clear direction, analysts say.

A host of issues including increasing liquidity, listing state-owned enterprises (SOEs), speeding the Dollar Board and the Small and Medium Enterprises Board, Delivery Versus Payment (DVP) and new products such as Exchange Traded Funds, structured warrants, REITS and equity-linked derivatives, etc are still unresolved. Adding to this is the delay in appointing a chairman and commissioners to the Securities and Exchange Commission (SEC).

While Ranel T. Wijesinha, a well-known accountant and corporate director, is said to have been appointed as the new chairman of the SEC, the move is yet to be to be announced. He will take over from Thilak Karunaratne whose term ended in mid-January 2018.