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Currency review: The T&T Dollar
T&T, via the Central Bank of T&T (CBTT) operates a “managed” floating exchange rate regime, which effectively pegs our TT$ to the US$ within a desired trading band.
Recently that trading range has come under some pressure, with the mid rate moving from TT$6.25 per US$ to a high of TT$6.40. As Figure 1 illustrates, the TT$ has been gradually depreciating since 2009. Since the start of 2009, the TT$ has depreciated 2.03 per cent, while on a YOY basis the TT$ has depreciated 0.66 per cent.
The primary reason for the rising exchange rate can be identified as the relative lack of supply of US$ in the market. The decline in supply of US$ could stem from a decline in country’s major revenue and foreign exchange earner, oil and natural gas exports.
While traditionally T&T has been an oil rich nation, natural gas has increased in prominence to become one of our main hydro carbon exports. Natural gas production accounts for 70 per cent of revenue while crude oil production accounts for only 30 per cent of our hydro carbon revenue. Over the past twelve months, oil prices has risen by 25.35 per cent (West Texas Intermediate pricing), however natural gas prices have declined by 16.25 per cent (Henry Hub pricing).
On a net basis, hydrocarbon revenue would have decline by approximately 4 per cent YTD. This would have a negative impact on the supply of US$ to the local market. Oil prices are projected to rise by 3.04 per cent towards the end of the year, while natural gas prices are expected to increase by 19.35 per cent according to Bloomberg estimates.
By the CBTT opting to allow our currency to drift upwards, some of the pressure to utilize the country’s US$ reserves in defense of the currency peg has been alleviated. As of October 2010, reserves stood at US$9.1 billion.
Figure 2 shows that over the years the Government has built up substantial foreign reserves in the ‘good times’ but haven’t resorted to using its stock of US$ to prevent the currency from depreciating.
The CBTT, however, is still well equipped to enter into the market to provide US$ as they see fit, to defend the currency and in cases of emergencies.
With the TT$ depreciating, a natural consequence would be more expensive imports and cheaper exports. This would be of help to the country’s current account balance only if the proportionate volume of exports rose by more the proportionate decrease in prices of exports.
While at the same time the proportionate decrease in volume of imports was greater than the proportionate increase in the price of imports. It should be noted that a higher import price would more than likely lead to higher inflation.
With US$ revenue from energy exports projected to increase throughout the year, in addition to substantial currency reserves, the CBTT would be in a strong position to defend the currency from depreciating further. However, individual and institutional demand for a “hard” currency may continue to place strain on the TT$/US$ exchange relationship.
Let’s now briefly look at how some of the major currencies have performed relative to the US$, as well as their outlook for the remainder of the year.
The British Pound (GBP)
Over the last 12 months the GBP has appreciated 6.69 per cent. Year-to-date (YTD) the pound has appreciated 3.71 per cent, rising to a high of US$1.63 per GBP as at the end of February. The pound is projected to continue to appreciate to US$1.66 towards the first quarter of 2012 as the global economic recover continues in the aftermath of the 2008/2009 financial crisis.
The Canadian Dollar (CAD)
Year on Year (YOY), the CAD has appreciated 4.55 per cent against the US$.
YTD, the Canadian Dollar has appreciated 2.10 per cent to C$0.97 per US$, achieving parity with the US$ at the end of December 2010 and the end of January 2011.
The CAD continued to hover close to parity over the last three months. The CAD, however, is forecasted to depreciate by 2.97 per cent back to parity with the US$ by the first quarter of 2012.
The Japanese yen (JPY)
The Japanese yen is of great importance to us here in T&T, as one of our major imports (motor vehicles) comes from Japan. It has been a period of strengthening for the Asian giant over the last year; the
Yen hit a peak value of ¥80.40 per US$ at the end of October 2010, appreciating from a level of ¥94.61 in April 2010. YOY the yen has appreciated 9.50 per cent, while YTD the yen has depreciated against the US$ by 0.23 per cent.
The yen is forecasted to further depreciate to ¥89.00 per US$ by the end of the year from its current rate ¥81.93 per US$.
The Indian Rupee (INR)
The rupee showed little change over the last 12 months, depreciating by 0.01 per cent. YTD the rupee has appreciated by 1.18 per cent to Rs45.24 per US$. The rupee is projected to appreciate by 1.86 per cent to Rs44.40 in the first quarter of 2012.
The Euro (EUR)
The Euro, which is the common currency for most of Europe, including major first world countries such as Germany, France, Italy etc, has appreciated over the last year by 6.69 per cent against the US$.
YTD, the currency has appreciated 3.71 per cent to around US$1.60 per Euro. Recent forecasts suggest that the currency will to depreciate by 2.12 per cent to around US$1.36 per Euro in the first quarter of 2012.
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