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Investing Basics:  Impact of the appreciation of the JMD on my investment
Sunday 15, April 2018

Investing Basics:  Impact of the appreciation of the JMD on my investment

PamelaF

 

 

 

Investing Basics:  Impact of the appreciation of the JMD on my investment

Over the past few years we have seen significant declines in the Jamaican Dollar against the US dollar.  For example, 2014 began with an exchange rate of J$106.38 to the US dollar.  At the time of writing (April 13, 2018) the rate has reached J$125.24. 

This decline however has not been a straight line occurrence.  In May 2017, the exchange rate peaked at about J$130.  Since then, the rate has seen mixed fortunes, increasing and decreasing according to market forces, ending with a current appreciation to J$125.24 from the May 2017 level.

But the appreciation of the Jamaican dollar over the past year has become more of interest to investors and especially bondholders.  It must be remembered that although an appreciation in the dollar is generally a good thing, the impact is different among stakeholders.  For example, an appreciation in the Jamaican dollar is favourable to importers as they pay less in Jamaican dollars for goods they purchase abroad.  Exporters, on the other hand, will find that an appreciation in the Jamaican dollar is not so favourable to them, as the US dollars they earn from their exports translate into fewer Jamaican dollars. 

In a similar way, the appreciation and depreciation of the Jamaican dollar also affects holders of US dollar denominated bonds.  During periods of appreciation in the Jamaican dollar, income received by these bondholders will convert at a lower Jamaican dollar rate, so they will receive fewer Jamaican dollars when they convert the interest they have earned on their investments.  But if the Jamaican dollar is depreciating, the same US dollar interest will convert at a higher Jamaican dollar rate giving the investor more Jamaican dollars (good for persons living off their income).

Another aspect of the appreciation/depreciation dilemma faced by investors is the tendency for investors to believe that during times of appreciation of the Jamaican dollar, income earned on Jamaican dollar denominated investments tends to be better as Jamaican dollar denominated rates are historically relatively higher than US dollar denominated rates.  However the relationship currently prevailing is not necessarily the case, as some US dollar investments offer much higher rates than Jamaican dollar denominated investments.

Also, when the Jamaican dollar is appreciating, investors tend to abandon converting their Jamaican dollars to US dollars as they fear that when they are ready to use their funds in Jamaican dollar terms the conversion rate might be lower, because of the appreciation.  This is not a bad strategy, but investors must be cognizant of the general trend of a 15.65% average annual depreciation in the exchange rate over the past 40 years.

This means that investors should not lose sight of the fact that periods of appreciation might be an opportunity to take advantage of converting at lower prices.  But this must not be done for short-term purposes since appreciation could last for elongated periods; and this is when investors generally get hurt.  Converting from Jamaican dollars to US dollars should be done wisely; usually for a period not less than one year.

Investors also need to monitor their investments in addition to the market.  On this point it is necessary to point out that exchange rates published by the media are generally the sell rate, unless otherwise expressed by the media.  Investors should therefore ensure that they are applying the appropriate rate to their investments.  There is currently a vast difference between the sell rate and the buy rate for the US dollar.  I have recently seen buy rates as low as J$116 and sell rates as high as J$126 at one financial institution.  These are very wide spreads!

Exchange-related investing can be very involved and often complicated.  It is important therefore that investors seek the advice of a trusted investment advisor when making exchange-related decisions.  Happy investing!

                                        

Pamela Lewis is Vice President, Investments and Client Services at Sterling Asset Management Ltd. Sterling provides financial and advisory services to the corporate, individual and institutional investor. Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, please e-mail us at: info@sterlingasset.net.jm or visit our website at www.sterling.com.jm

 

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