The Reserve Bank of Zimbabwe announced on August 21 that it had set the threshold for foreign currency retention at 70% for all exporters. The bank has said that the decision comes into effect immediately. The announcement is a part of the broader measures that have been drawn up to promote productivity in the country and sustain the system of foreign currency auction. The retention threshold for the exporters was set at various levels previously and was dependent on the degree of lobbying from the different sectors.

In early 2020, miners were allowed to keep up to 70% of their hard cash. It increased from 55%, and the farmers were allowed to retain only 50%. The rest was cleared off at the ruling exchange rate. Dr. John Mangudya, the Governor of Central Bank, has clarified that the period of liquidation of the unutilized balances of foreign currency has shot up to 60 days from 30. The extension of the liquidation period will help the exporters to manage their cashflows better.

The foreign currency auction system was introduced in June. It has received rave reviews for bringing about stability in the country’s economy through facilitating hard currency to the productive sectors at an affordable rate. Earlier, the primary source of foreign currency for the companies was the parallel market, but it came at a high price.

To sustain the auction system, the central bank has decided that 20% of the foreign currency receipts of the providers of goods and services will get liquidated when deposited in the domestic foreign currency accounts. However, the existing balances in the domestic foreign currency accounts will never get affected by the implementation of this policy. The central bank has confirmed that the foreign currency account balances have grown to USD 405 million from USD 352 million in January. The swelling of the foreign currency balance is excellent news as these are sure signs of the growing confidence in the economy.

The dollar moved higher today, snapping a seven week-long losing streak. It was supported by stronger jobs data and global currency market demand for safe havens while there are concerns regarding COVID-19 recovery.

Dollar Drifts Higher

In the Asian session, early moves were modest since traders were waiting for data from Chinese trade, which was due at about 0200GMT. The positive sentiments about the dollar are because of the expected increase in industrial output as well as good recovery in retail sales.

The dollar also traded strongly against New Zealand and Australian dollars, which are more risk-sensitive. Another reason for the strong performance of the dollar is the subdued Australian dollar because of the testimony by the central bank governor that economic recovery will take more time.

Similarly, the New Zealand dollar was also under pressure due to the fresh outbreak of coronavirus cases.

Imre Speizer, the FX analyst at Westpac, said that it is clear that there is a slow down in the risk sentiment, but it is way too early right now to comment that downtrend we were witnessing is over.

The Positive Indicators

Presently, there is a drop in the weekly unemployment benefit applications. Such applications dropped under 1 million ever since the pandemic started and there were 9,63,000 claims compared to the expected 1.1 million unemployment benefit claims.

However, there is still a long way to go as about thirty million people in the U.S. are presently unemployed and the aid package aimed at keeping the stimulus flowing got stalled. However, due to the positive sentiments in the economy dollar has been able to slow down a slide that took it down by 9.5 percent from where it was in March.

As U.S lawmakers, the Republicans and the Democrats fail to reach a consensus on the way forward for an economic stimulus package, the dollar recorded losses against the major currencies.

On the other hand, European Union leaders have finally got their act together. Spearheaded by German Chancellor Angela Markel and Emmanuel Macron, President of France, the EU leaders have agreed to a 750 billion Euro stimulus package for the coronavirus hit economies. As a result, the Euro went at its highest level in more than a year as the dollar wobbled on the uncertainties in the U.S.

Shane Oliver, the chief economist at AMP Capital Investors in Sydney, explains,

As a result, the greenback went at $1.2727 against the British pound. It has fallen to 0.9323 for the Swiss franc, again a four-month low. AUD rose to $0.7144, the highest since April, while NZD closed at $0.6649, the highest since January. However, it has been intent at 106.79 on the yen.

The deadlock by the U.S lawmakers is not new. The House of Representatives had, two months ago, proposed a $3T relief package, which was ignored by the Republican-controlled Senate. Now, the Republicans are considering a $1 trillion package which the Democrats led by House Speaker Nancy Pelosi say is grossly inadequate.

Even as late as yesterday, there has been no clear understanding between the Republicans and the Democrats on the quantum of COVID-19 relief, especially for extending unemployment insurance to those retrenched during the ongoing pandemic.

There is hope that the dollar might soon get out of the trench it is in now. Investors are optimistic about U.S. home sales and jobless declarations.

The dollar came under sustained pressure as a fiscal package to rescue the economies in the European Union and the positive progress towards a Covid-19 vaccine appeared to be a reality today. Even though the summit of European leaders dragged beyond the fourth day, there appears to be a consensus on a huge stimulus package for the bloc.

This optimistic outlook achieved a breakthrough for the Euro as it ended on a 4-month high at $1.1467 and held a shade below at $1.1460 in the trade of Asia. Apart from the stimulus package, news filtered in of encouraging test results of a COVID-19 vaccine. Scientists at Oxford University seem to have finally broken the glass ceiling and a vaccine to this dreaded disease seems to be on the cards.

A combination of these factors is responsible for the pressure being exerted on the greenback and the Euro giving off positive signals.

It is not only the Euro that has seen a positive trend against the dollar only; other currencies have been similarly affected with the dollar trading at 95.687. The pound finished with a gain of $1.2683; the AUD rose by 0.1% to above 70 US cents and the same is the case with the NZD. The Yen, though, held ground at $107.23.

The Commonwealth Bank of Australia FX analyst Joe Capurso while commenting on the development, said,

The market optimism is largely attributed to the development of the Covid-19 vaccine too. In a collaboration between AstraZeneca of Britain, Oxford University, and China’s military research unit CanSino Biologics, the drugs developed have come out successful and have triggered a reaction in human trials.

In the meantime, talks on the European package are slated to be resumed today when Britain’s negotiator David Frost hosts Michael Barnier, his EU counterpart, to dinner.

On Monday, the Euro climbed almost four months up from the dollar. As the investors, expected the European leaders crack the deadlock, and ink an economic bailout package when they approached a record-size marathon summit.

EU summit:

The Euro changed hands at $1,1439, only below a four-month peak of $1,1452 on Wednesday.

The EU leaders were at a deadlock over a potential recovery fund of EUR 750 billion ($858,30 billion), which the executive European Commission will collect on their behalf through the EU’s financial markets.

It will be a landmark move in the direction of a greater convergence of fiscal capital for the Union. But many “frugal” wealthy northern European states have sought to locate a smaller fund in the process of minimizing the allocation of funds between grants and repayable loans.

A source estimated that EUR 350 billion in grants, was the highest appropriate to the thrifty north camps. It was compared to the 400 billion that many others, including Germany and France, found to be a bare minimum.

Diplomats also indicated that the meeting could be postponed and that they would seek to find a deal again next month. But business participants assume that they will enter a deal in the future even though they failed to execute this time.

Other Currencies:

Diwan security strategist, Yukio Ishizuki said that he is unable to conclude what the meeting was supposed to mean. He also added, even though there is no deal, the effect is going to be minimal as the Euro now seems fairly Strong.

While buyers retain a high tolerance for uncertainty, the currency is increasingly low, banking for further investment, not just from Europe but also from the USA.

The dollar index was 95.949 and, last month was nearly three months low of 95.716.

Among other markets, the British Pound stood at $1.2570 and the Australian Dollar For $0.6999.

China’s offshore yuan has stood at $6.9889, a little less than last week’s 6.9806, which was high in four months.

On Wednesday, the currency markets saw a revival of the risk sentiment as the steady progress towards the COVID-19 vaccine helped to strengthen the commodity currencies and the rebound of the equities. All these developments have pushed the dollar to a one-month low.

Since June, the dollar index fell below 96 for the first time, thereby dropping to a one-month low of 95.770. However, it managed to recover some of the losses in the afternoon trade finishing at 96.070 finally.

Moderna, a US Based company, has produced a COVID-19 vaccine on an experimental basis, and it induced immune responses from all 45 volunteers. However, there is still some space for caution as the US-China relations have worsened, and there are hidden fears about a possible economic impact of the 2nd wave of Coronavirus vaccine in the US. Florida, the new epicenter of this deadly pandemic, has reported more than 100 further fatalities that bring the total death toll over 4500.

The Canadian dollar was 0.73% stronger, and the NZD was up by 0.46% among the riskier currencies linked to commodities. The USD’s present weakened situation was attributed to the risk-on backdrop that saw the stocks head higher, prompting undoing the safe-haven USD positions. The sudden surge in risk-taking was due to the news that Moderna’s experimental vaccine has a lot of promise.

The Euro has risen to a 4-month high of $1.145 vs. the dollar and is very close to a peak of $1.150 that was achieved in the early part of March. The currency got a boost by the unique combination of the dollar’s weakness and the hope that the EU leaders will finally reach an agreement about the Coronavirus Recovery Fund.