Doesn’t Buy Hedging Story
The rupee slid by 10 Sri Lanka cents (SLC) in Friday morning’s trading (over that of Thursday’s close) to the Rs. 111/111.10 levels in two way quotes on the back of state banks buying the greenback probably to settle a petroleum bill, but gained lost ground by afternoon to be quoted at Rs. 110/97 in spot, a market source said.
“The market didn’t buy the story run as the lead article in a daily on Friday that the Arbitration Panel hearing the oil hedging case had given their verdict in favour of the three litigating foreign banks against Ceylon Petroleum Corporation (CPC),” he said (See also page 35).
What is apparently due to happen is that the Panel scheduled to give their verdict only on the Citi Bank case in March, he said.
On Thursday, the US dollar appreciated by SLC 15 to the Rs. 110/95/111 levels in two way quotes on the back of demand emanating from a foreign bank which on the previous working day Tuesday sold some Rs. two billion worth of Treasury (T) Bonds to the market in exchange.
Wednesday was a poya holiday for the market.
However the rupee was expected to regain lost ground in the coming days (which it did) due to slack demand for the greenback coupled with exporters encashing their dollars on the belief that it will dip in the future.
Foreign banks generally act as custodians to foreign investors who have invested in local T Bonds and T Bills, making or selling such investments on behalf of their clients.
When foreigners make such investments, there are foreign inflows into the market and when they withdraw, there are outflows. Thursday’s case was an outflow, hence the pressure on the rupee to depreciate against the dollar caused by demand for the greenback.
This foreign bank disgorged some Rs. two billion worth of T Bonds of 2015 maturity at a discount at Tuesday’s secondary market trading.
“It dumped the 2015 maturities at about 10-15 basis points (bps) higher than the market rate, at the 8.70% levels, whereas in the market they were trading at the 8.55% levels,” a market source told this reporter.
Disgorging of such Bonds in the market means that ipso facto there will be a demand for dollars to reimburse such investors once they withdraw from the market, hence the pressure for the exchange rate to depreciate, he said.
At an exchange rate of Rs. 111 to the dollar, Rs. two billion works out to US$ 18 million.
Secondary T Bond market turnover as a result of this transaction went up to Rs. five billion on Tuesday.
On Tuesday, the dollar was trading at the Rs. 110/80/85 levels, with the Central Bank of Sri Lanka (CBSL) protecting the dollar at the Rs. 110/75 levels, a position that it took-up in the prior week (ie January 10-14 week), where the pressure then was for the exchange rate to rise. However with the pressure on the dollar to appreciate last week, CBSL was absent from the market.
“Even selling the 2015 maturity T Bonds at a discounted rate of 8.70% on Tuesday may yet have resulted in that foreign bank having had made money after having had invested in the same during the war years when the weighted average yields of such bonds fetched between 12-13% in the primary auction and all that,” he said.
However on Thursday, due to slack trading, the weighted average yield (WAY) of the 2015 maturity contracted by five bps to the 8.65% levels, a position it held with no change even on Friday. The reported assurance given by CBSL Governor Ajith Nivard Cabraal that policy rates won’t be hiked despite possible inflationary pressure on the economy due to allegedly rising commodity prices made worse by the recent floods, expected to impact this year’s Maha crop (thereby causing food shortages and therewith prices becoming dearer) may act as a balm against pressure on rates to rise, the source said. And to complement Cabraal, market liquidity in excess of Rs. 100 billion may well be a dampener for a rate hike.
“If at all rates may go down in the new week,” he said.
However, on the flip side rates may not go down either, unless there is a rate cut during the year, he said. CBSL’s current overnight policy borrowing rate is 7.25%.
T Bonds of 2012, 2013 and 2014 maturities were trading at the 7.40%, 7.55% and 8.10% levels in secondary market trading on Thursday and continuing upto Friday, unchanged from Tuesday’s position, which the source deemed as being reasonable considering the fact that one year T Bills fetched a price of 7.31% at Tuesday’s auction.
Tuesday’s T Bill primary auction saw the 91 and 364 day Bills fall by six and two bps to 7.01 and 7.31% respectively, while the 182 day maturity gained by two bps to 7.09%.