But some say we have been there before only to see the local currency continuing on a runaway train. This time around it could indeed be vastly different. The fundamentals of the economy seems strongly in support of the local dollar that may well have exceeded an accepted competitive level, much lower than the 2017 lowest value.
A number of positives have taken place. The fall in the price of oil on the world market has been a major savings and gone a long way to ease pressure on the Jamaican dollar. But other imports have fallen as well with the devaluation of the local currency while non-traditional exports have been rising fast. The BPO sector along with tourism, have done very well in earning added inflows. The net result is that the country’s current account has improved considerably at sustainable levels. The full restoration of Alpart’s operation means even more foreign exchange earnings for the country.
The Jamaican dollar lost value almost directly as a result of prolong period of excessive fiscal deficit that government ran for decades. Government is now running fiscal surpluses and that will keep inflation and interest rates low for a prolonged period and should result in a sustained value for the local currency. Importantly, with increased production of goods and services many Jamaican companies are enjoying a period of increased productivity that augurs well for increased competitiveness which lends support to the recent revaluation. Come 2019, a major portion of electricity generation will be at reduced rates as JPS switch to new sources of electricity generation that should add more to productivity.
Technically, the long term trend suggests continuation of depreciation of the dollar but shorter term chart shows a neck and shoulder pattern suggesting that the currency could correct lower to J$120 to the US while the upper trend line of the channel which was broken in 2014 could be broken if the positive trend in the economy continues, in such a situation the local dollar could fall below J$120 to the US with J$116 seems like a possible level.
A look at the chart since 2016 suggests that the continuing weakness over several years may well give way to a break below the long term channel top during 2018, which may have long term implications for the local dollar, it could mean that the continuing decline in the value for several years may be arrested for some, provided the fiscal discipline is maintained.
Story first appeared on business site icinsider