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Spot Weakens, Forwards Strengthen

  • FX Market

The exchange rate (ER) Friday over Thursday weakened on the back of state buying, market sources told this newspaper.

“The ER weakened by between 10-15 Sri Lanka cents (SLc) to close the weekend at Rs. 130.75/80 to the US dollar ($) in two way quotes in interbank spot trading, with the state buying the ER at prices ranging from between Rs. 130.75-Rs. 130.78 on the back of muted importer demand, they said.

State buying is generally to settle a petroleum import bill or such like from the foreign exchange (FX) market.

The ER the previous day Thursday had had closed at Rs. 130.65 to the $ in interbank spot trading, also on thin trades.

Week on week the ER has had weakened by between 5-10 SLc to Rs. 130.75/80 to the $ in two way quotes in interbank spot trading as at Friday, having had closed the previous week at the Rs. 130.70 level.

However in the forward market, particularly in the more liquid three months forward market, the $ premium has dropped to Rs. 1.20, from Rs. 2 three months ago, the sources said. Likewise the premium of one year forwards has had declined from Rs. 10.50 two months ago, to Rs. 6 currently, they said.

Under perfect conditions, the forward market moves in tandem with the interest rate differential between the two countries, ie the USA and Sri Lanka, where the former has a near zero or a very low interest rate on its Treasuries, compared to that of Sri Lanka’s.

But with the sharp decline in the one year T Bill yields in the past few weeks in the local primary market in particular, that also has had a knock on effect on forward rates, they said. However, in Sri Lanka, the forward rate is not only determined on the interest rate differential, but also on expected inflows, the sources added.

At the beginning of the week on Monday, the ER remained unchanged at Rs. 130.70 to the $ in interbank spot trading also on thin volumes, they said.

However on the following day Tuesday (December 24), the ER marginally strengthened on thin trades by a nominal five SLc to Rs. 130.65 to the $ in interbank spot trading on thin volumes, the sources said.

Part of the reason for this state of affairs may be due to slack demand for $s by the market (see also the business pages in last week’s issue of The Sunday Leader).

Wednesday December 25, Christmas day, was a holiday for the money and foreign exchange markets, in that it was a bank, public and mercantile holiday.

Meanwhile on Thursday, the ER remained unchanged over its previous day’s figure of Rs. 130.65 to the $ on thin trades, in interbank spot trading, they said.

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