Have you ever wondered how the parallel currency rates are determined? Is it purely market forces at play where the price is determined by the demand and supply? Ceteris paribus, this is the case purely market determined rates but deeper analysis shows this is not the case at all. There is market intervention and a few big sharks in the game who determine the parallel market rates.
We posed the question to our forum members and below cover their responses. Who determines the street rates in Zimbabwe?
Michael Muchena The Old Mutual Implied Rate.
Tonderai Chibanda Always demand and supply. In the Zim context because we import, every bond or whatever ends up looking for forex, therefore because forex is limited commodity willingness to pay at a premium is always there. Imagine two people one who is ill and wants to be treated in Singapore, or SA the other wants to by a car from Japan. Suppose seller has US$5000, those who want the Forex compete to get it. Hence the increase in prices. In RTGS money supply growth has played a crucial part. As money is created and more money goes to seek Forex, the greater it’s availability the more the price of Forex. Too much money, RTGS, chasing too few goods, USD.
Alec Farai Katsere Well said but…. I think forex dealers and cash barons are the ones causing it to happen. Remember in the time of Zim dollar they used to stash the money outside the country and this pushed the RBZ to print new notes.
Tonderai ChibandaAlec my brother, there is no-one who used to stash money outside Zimbabwe, even during the dollar era. A rational economic being will never do that, to what end would be a great question. I think it was propaganda as usual. Zim dollar was trade-able in Zim, the holding of it in an inflationary period was counter-intuitive. The printing of money was dome to finance the deficit we had. Remember the quasi fiscal operations of the RBZ, they were funded by RBZ using the printing money to buy money on the black market. Since companies were operating low, no Forex came to gvt, this is what forced them.
Zivai Mashanga This is the general explanation, but how do we get up one morning with the Rate at 5.5. Who “exactly” determines the rate?
Tonderai Chibanda Zivai my brother, the market determines that, that is why it is called the free hand. They are points of equilibrium that happens. A moving equilibrium albeit in Zimbabwe. It’s not unique to Zimbabwe too, many countries have experienced the same thing. Roadport as an example is an almost perfect market, there is not so much information asymmetry. If big buyers are buying, the general prices are readily known. It’s a willing buyer willing sellers most companies can’t survive without forex. There is noone who determines the rate but that fact that someone comes and offer a better rate and agreement is made and the information spreads across the market is the explanation. Currencies are traded around the world, who determines those rates, I might put a similar question to you?
Brian Matare: Tonderai Chibanda I feel your explanation is exactly what we all believe happens in the parallel market system but um sure almost of us have been down to 4th Street and we know the rate of the day is set… Hence the question by who… A number of times I have been told kuti call back after such such a time.. Bcoz hatisati tapiwa rate… Vanopiwa nani🙄 anenge aripo here achiita analysis kuti nhasi vanhu varikuuya nemarii? Or tine ma bond mangani in rtgs or cash?
Abel Moyo The elite in Zimbabwe control the rates coz when they plan to import a rolls royce they wipe all the usd from the street. They peg whatever rate they want.
TC Jakarasi Markets , what is markets anyway? I dont think you can separate supply and demand from the markets because thats where everything happens, it can be a world market , or our own isolated market where we categorise them as parallel or black market and the interbank , so without supply or demand we cant have a market .
Mdala Wa Rue: Great, who are the players in this market?Do they have equal power? Do we have cartels?
TC JakarasiMdala Wa Rue 1) We got Market Makers/cartels/sharks , these ones got large sums of money and can work in groups or individually to manipulate the price of the day so that they profiteer by liquidating other players who have placed orders already in the market to buy or sell. So if a large amount buys that currency increase in price because their big buying order creates demand and when other player are trying to jump into the market to catch a fast moving price- they sell at high price and the price goes down remember by that time most players will still be buying , especially NEWBIES thats how they manipulate.
TC Jakarasi Mdala Wa Rue 3)Retail players and newbies…… Retailers are in the market as a second option of earning or as their only way of earning either to supplement or make a living out of this market. Some are very experienced some are not but they are honest players. The inexperienced ones are the ones which can be liquidated because of insufficient experience- some of them are greedy and want to get rich quick and lose everything. Newbies are the most affected -they just heard you can make money out of the markets but oblivious that market makers are waiting for them , they dont plan their trades, they can use all their savings to get rich quick as well , they dont understand markets, at the end they lose but the marates dont stop there , other new players will come around as well.
Mdala Wa Rue: TC Jakarasi Great stuff..awesome…i knew it wasnt a simple answer of demand and supply…there has to be a few big sharks who eat small fishes entering the pool and these guys take demand and supply into consideration plus their own profit interests….question solved!
TC Jakarasi Mdala Wa Rue we still have to research this is according to my knowledge it might not be correct to others but I believe it makes sense.
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