The auction system is working ever better as the process of price discovery becomes more exact, with just $12 between the top bid and the lowest successful bid in the last auction and with the weighted average a little over $2 more than the lowest successful bid suggesting that the general range of most successful bids was a lot tighter, perhaps $70 to $76.
The fact that the top bid has been easing down from $100 to $82,17 over the five auctions in the past four weeks suggests, as well, that bidders are becoming more precise in their calculations and less liable to assume that the black market knows better.
Even the black market, though, has been reacting to the auctions with prices falling, partly a result of the reduced demand as most big timers move off the streets and into the RBZ tower, partly a result of the efforts taken to stop large anonymous transactions, and partly the results of people gradually expecting stability.
Smaller transactions still proliferate in the black market. Since a street dealer can move $20 000 of EcoCash a day, this is not going to go away that soon. But a 20 percent drop in what the street dealers will pay is, by any standards, significant despite efforts by those who dominate that market to keep rates as high as possible.
Prices in retail markets are stabilising, with more tracking of the auction rate rather than the street rate and the start of some pricing based on actual costs, rather than expected costs. The problem in some retail sectors, the luxury trade for example, of stock bought with $100 is still apparent, so customers with both currencies still ask “what rate?”.
Thanks to the tendency before the auctions to price to black market, the Reserve Bank of Zimbabwe has escaped the blame for the rapid price rises and inflation up to the fist auction. So the political pressures are reduced significantly and there are now headlines of the Zimbabwe dollar crashing.
An extra boost came with the influx of US$3,5 million from sellers in the last auction, around a quarter of the total on offer. So the RBZ market is now starting to attract sellers, and the stability it has been building is showing that you might as well this week rather than wait another fortnight, which is now doubt what the RBZ has been intending as it puts enough of its own money into the auctions to get the basic trading working but not enough to create prices unattractive for sellers.
This price discovery process might, however, have been creating a metastable pricing, to borrow terms from physics.
Governor Dr John Mangudya did bowl that one googly along with his fast pace deliveries to the black market and near donkey drops in his own auction system.
He casually mentioned, almost in passing, that there is pushing US$1 billion in the private foreign currency nostro accounts and around $40 billion in the ordinary deposits. There is also that cash money, in both currencies, squirrelled away but considering his reluctance to print much, and the desire of so many, as robberies are showing, to keep stacks of US$100 bills in hiding, it is impossible that the Zimbabwe banknotes hoarded out of the banking system could be anything close to that 40:1 ratio with the hidden US notes.
This little bit of information shows that there is a lower limit to the auction rate, $40, but that would mean that all the US dollars stashed in nostro accounts were simultaneously sold.
Of course a good block of them are not for sale, they are committed already by their holders to buy the equipment, spares, inputs and services required by their holders, the major exporters, and even to pay dividends to foreign shareholders.
But that same ratio also starts setting an upper limit to the auction rate. There are not unlimited Zimbabwe dollars available to buy whatever is put on sale.
The half yearly fiscal review by Finance and Economic Development Minister Prof Mthuli Ncube made it clear that there would not be any unlimited funds in Zimbabwe dollars. He managed the remarkable achievement of keeping within his budgets for the first half of the year and is quite confident, despite all the pressures brought by Covid-19 and inflation, of doing the same in the second half.
There are more imponderables. It looks like we will grow at least six months supply of wheat, possibly seven months. Various logistical problems prevented the planting of the desired 80 000ha, but the 42 000 now being irrigated is still far better than in recent years. So there is one set of pressures on foreign currency reserves sharply reduced.
Anything approaching even vaguely reasonable rains this coming summer should see something close to maize self-sufficiency, with a pile of preparations being done in time. And feeding ourselves does again reduce pressure.
On the supply side for the foreign currency markets, the tobacco crop was better than expected and average prices are rising, thanks to more experienced farmers managing the tricky bits like curing a grading that can add value, or destroy value if done badly. And world oil prices are low.
Long term trends are difficult to calculate, especially when quite a bit has to be based on when medical scientists will produce a safe and effective vaccine against Covid-19 and when, after the formula is discovered, the world’s pharmaceutical companies can produce at least 7 billion doses and, if two doses are needed as some now suspect in early trials, then 14 billion doses.
Vagaries of Southern African rainfall patterns, vaccine research, the progress of the anti-smoking lobby, the fuel demands in Zimbabwean partial lockdowns and the world price for gold and platinum all need to be considered.
But recognising that there are lower limits to the exchange rate, based simply on the money supply figures for US dollars in Zimbabwe and the number of local dollars in existence, and upper limits based on how long exporters can keep their spare money in nostro accounts, is a start.
Some of those low bids that do not make the cut are possibly not being made by businesses taking a chance, but rather by businesses wondering how money supply pressures will pan out, and wondering if there is a modest bubble in the making. So far they have been proved wrong, but keeping options open is difficult if only one bid per bidder is possible.
The interesting part of the auction system is that it is a market, and that means supply and demand play the major roles. The RBZ has a little room to manoeuvre, turning taps open a bit or down a bit, but not much in the medium term, let alone the long term. And even in the very short term it cannot make or break a market.
So the process of price discovery will continue, but there are no guarantees that prices for foreign currency will eternally rise, and in fact cannot considering the money supply, nor that the market will suddenly collapse if everyone dumped their nostro dollars tomorrow, since that is also very unlikely. So the metastability now in place is likely to remain the new stability, but nothing being guaranteed.