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The Fijian Dollar:Trading Trend Highlights

The Fijian Dollar:Trading Trend Highlights
Shoran Devi
June 09
11:00 2018

Exchange rate is the price of one national currency, such as the Fijian dollar, expressed in terms of another cur­rency, for example, the US dollar.

It tells you how much of a local currency you need to buy a foreign currency.

The price of a currency is gener­ally determined through the mar­ket forces of demand and supply, however, is dependent upon the exchange rate regime a country fol­lows.

Exchange rate regimes (or sys­tems) are the framework under which the price of a currency is determined.

An exchange rate regime is a sys­tem that a country’s monetary au­thority usually the reserve bank, adopts to establish the exchange rate of its own currency against other currencies.

There are generally two types of exchange rate regimes: fixed, also known as pegged system and float­ing or flexible regimes, and coun­tries are free to adopt the exchange rate system which they consider more optimal.

In a floating exchange rate sys­tem, exchange rate values are de­termined by the market forces of demand and supply and as such the exchange rate adjusts on a continu­al basis. In a fixed system, exchange rates are either held constant or al­lowed to fluctuate only within very narrow boundaries.

In this system of currency pric­ing, the Reserve Banks play an inte­gral role in maintaining a curren­cy’s value. Fiji has a fixed exchange rate regime where the Fijian dollar (FJD) is pegged to a trade weighted basket of currencies comprising the Australian dollar (AUD), New Zealand dollar (NZD), United States dollar (USD), Japanese Yen (JPY) and Euro (EUR).

The weight of each currency in the basket is determined by its im­portance to Fiji’s trade in goods and services.

When the value of the Fijian dollar increases relative to other currencies, we say that the Fijian dollar has strengthened or appreci­ated.

Alternatively, when the value of our dollar declines, we say that the Fijian dollar has weakened or de­preciated against other currencies.

Movements in the Fijian dollar reflect the movements in the major currencies in our basket in the in­ternational currency market.

Let us look at how the Fijian dollar traded against the basket of cur­rencies it is pegged to,on a simple moving average basis from Janu­ary till May this year.

US Dollar

Generally, the emerging curren­cies gained strong footing against US dollar’s bout of weakness in the early months of this year, which was of course due to a variety of factors.

However, the dollar gained mo­mentum from April and had strengthened further in May.

This had been the steepest dollar rally that investors had seen in the past year.

In what seemed to be an eventful year for the US, the macro-econom­ic factors as well as the geopoliti­cal tension together with Federal Reserve’s monetary policy stance had been the driving factors for the US dollar performance. The Fijian dollar had gained a bit of impetus against the US dollar earlier in the year.

However, the strong hold was short lived as the greenback gained support from their strong econom­ic performance, rising treasury yields, declining unemployment, inflation hovering at or somewhat above the Fed’s two per cent goal – all indicating a potential rate hike in the next policy meeting by the Federal Reserve.

On the simple moving average ba­sis, the Fijian dollar strengthened by 2.24 per cent against the US dol­lar when compared to the same pe­riod last year.

Australian and New Zealand dollar

The Australian dollar noted a good degree of volatility however, traded in close ranges since the beginning of the year.

The strong macro-economic data,weakening streak of the US dollar and the generally positive sentiment for the Australian econo­my added to the strengthening mo­mentum of the Aussie earlier in the year before its gradual weakening from March onwards.

The Aussie lost some ground of the back of strengthening US dol­lar in the recent weeks.

As a commodity currency, the Aus­sie tends to weaken when a strong­er USD results in weaker global commodity prices.

On average, the Fijian dollar weakened by 0.65 per cent against Australian dollar compared to the same period in 2017.

The Kiwi too was range bound. Low global interest rates, the over­all weakening of the US dollar and the positive outlook for the New Zealand economy relative to sever­al other advanced economies, had­reinforced investor confidence for New Zealand dollar assets over re­cent past, and so contributed to the average strengthening of New Zea­land dollar exchange rate earlier in the year. However, the Kiwi had lost some grounds in the months of May amid the growing investor in­terest in the greenback.

Compared to the same period last year, on average, our Fiji dol­lar strengthened by 0.13 per cent against the Kiwi.

Japan Yen and Euro

On an annual moving average ba­sis, the Fijian dollar largely depre­ciated against the Japanese Yen. Compared to the same period last year, the Fijian dollar weakened by 1.68 per cent against the JPY.

The strengthening trend of JPY was largely supported by the re­newed sentiments in their econom­ic growth.

The economy is expected to con­tinue expanding moderately.

Their central bank has also de­ployed a massive asset-buying pro­gramme to break Japan out of de­flation and accelerate inflation to their two per cent goal, all giving much needed boost to the demand for the safe-haven currency.

For the European economy,the improvement in the inflation picture,which is projected to have beaten forecasts in May, has helped stabilise economic data momentum overall. This had given a bit more certainty to the investors seeking stability.

The improving growthin the re­gion and a steadily declining unem­ployment rate with public deficit in the euro area decreasing from over six per cent in 2009 to as low as 0.7 per cent in 2018, have been providing the required support to the euro.

As such, on a moving average ba­sis, our Fiji dollar weakened by as much as 10.01 per cent against the euro. The strengthening local cur­rency means good news for our lo­cal importers as they have to pay less Fijian dollar for their foreign currency priced invoices or receive a bit more foreign currency notes against Fijian dollar when travel­ling abroad.

Conversely, a strong local cur­rency is not really favourable to those receiving overseas inward remittances from their friends or relatives abroad. Also, stronger Fi­jian dollar would make our exports become expensive to the overseas buyers and hence may hurt the competitiveness of our export com­modities in international markets.

For an open economy like ours, which is heavily dependent on trade,the external value of the cur­rency is particularly relevant as it affects, among other things, the prices and the volume of goods and services we export and import.

Because Fiji pegs its exchange rate to a basket of currencies, there are simultaneous upward and down­ward movements in the value of the Fijian dollar in the short term.

As we strengthen against one cur­rency, we also weaken against oth­ers.

However, over the long term, our currency has remained relatively stable against the currency basket.

Feedback: maraia.vula@fijisun.com.fj

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