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Friday January 21st, 2022
Bonds & Forex

Sri Lanka rupee dollar swap discounts widen, some interbank outright trades

ECONOMYNEXT – Sri Lanka’s rupee swap discounts have widened over the past few days while sporadic interbank trades have been seen at the official non-credible pegged rate of 203 to the US dollar, market participants said.

Sri Lanka’s rupee is under pressure from unprecedented money printing involving outright finance of the budget gap and monetizing of past deficits by putting price controls on maturing bonds of past deficits.

Swap rates are at a discount over continued tightness in dollar availability which has pushed up domestic yields for some banks.

Spot/1 month swaps are quoted around -90/-50 cents.

Spot/3-months are around -190/-150 cents

Spot/6-months are around – 350/-300 cents.

Some interbank transactions have taken place in recent day including so-called ‘pity deals’ where banks which see some dollar inflows will sell to desperate smaller ones, market participants said.

There are also signs of a two tier outright forwards developing with premium banks that have access to lower rate dollars as counter party, market participants said.

This allows exporters to sell forward dollars at a premium. Due to low interest rates and trading curbs forward market had also died.

In the kerb market US dollar are around 233.00/234.50 rupees. The Euro was around 271.00 rupees.
Undiyal transfers take place in excess of 240 market sources said.

The cryptocurrency Tether, a stable coin pegged to the US dollar is quoted around 236.80 to 236.98 rupees (23,680 for 100) by dealers.

Since May the Tether has moved up to current levels from around 220 rupees.

At Wednesday’s auction a 51 billion rupee Treasury bill offer was sold to the market. Treasuries auctions have improved after price controls were removed.

However without a credible peg the central bank is unable to sell down its Treasury bill stock to re-build reserves.

As a result, any sell downs of CB held Treasury bills at auctions are offset by overnight liquidity injections in the overnight market, leading to a sterilization trap.

The easiest way to get the forex market to work and end sterilization is to suspend convertibility (float the rupee). But analysts warn that floats will generally fail if interest rate are not sufficiently high to allow bonds to be sold to genuine investors.

Any interventions in the forex market for oil, or a failure of a bond auctions which will also fail a float.

Related

Why Sri Lanka’s rupee is in crisis, dragging the economy down: Bellwether

There have been calls reform Sri Lanka’s central bank to curb the ability of the Monetary Board to inject liquidity and engage in financial repression to de-stabilize the economy. (Colombo/Nov11/2021)

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